Regulations and frictionless marketplace assumptions

by Henry on July 10, 2012

A response to Matt Yglesias’s response. I understand from email that his original post responding to me was intended to be read together with an earlier post, where he separates out questions of freedom and economic efficiency, and argues, more or less, that the best way to increase the bargaining power of labour is by pushing full employment. This means that he does not, after all, treat market outcomes as being in some way natural. So consider those specific objections withdrawn. But I still think that there is something fundamentally wrongheaded about the way that he is analyzing these questions. And not only that – but Matt Yglesias himself (2004 vintage) would seem to agree with me.

As Matt says in his updated post, specific arguments for regulations intended to help the plight of the poor ought to be considered on their merits, given the trade-offs – they can’t simply be deduced from some generic ethical position. You’ll get no objections from me on that. But where you will find me objecting, and quite vociferously too, is to the suggestion that we ought to employ simple econ 101 style analysis in order to figure out the tradeoffs, and the appropriate solutions. This style of analysis has an awful lot of presuppositions built into it, and these presuppositions are politically loaded.

Let’s take the case of labour relations. If, as Matt argues, you ought to start with a model of firms, each of which has a cost function such that the total compensation they can offer is fixed, and any increase in costly rights (such as not having your body searched to stop you smuggling widgets out between your arse-cheeks) is inevitably associated with a proportionate decline in wages, then, indeed, you will end up concluding that compulsory rules forbidding body searches will lower overall choice without really benefitting anyone. But you only get to that result because of what you are assuming in the first place. You are assuming that there isn’t any real distributional action happening within the firm – and in particular, that the firm’s owners don’t have any surplus (that they are able to extract because e.g. of workers’ weaker bargaining position) that could be reallocated through regulation. In other words, you are only ‘refuting’ the people you disagree with, because you assume away the problem that they are worried about. Moreover, as Brad DeLong (!) points out sarcastically, the logic applies more or less identically to any economic concession that employers might want to extract from their employees in exchange for higher wages. The model isn’t an argument against particular forms of regulation – it’s an argument against any extraction-preventing form of regulation at all.

Now of course the example doesn’t work as well if you can’t simply assume a perfect equilibrium price arrived at courtesy of the perfect information and zero transaction costs that characterize the rental market in Economoville but not, say, Washington, DC.

and now:

Simply pointing out that an “economics 101” model of frictionless labor markets and full employment is an abstraction does not eliminate its analytic utility in pursuing these questions. If anything, the existence of frictions makes me more skeptical of labor market regulations. In a frictionless marketplace regulations would reduce wages but with frictions it’s likely to increase long-term unemployment which is worse in social welfare terms.

is quite striking. It is even more striking, because the back-up claim in the second quote has no compelling empirical support. Comparisons across advanced industrial democracies find no evidence that increased labour market regulation (including a variety of regulations that one might expect to have much more direct consequences than e.g. body searches) lead to higher unemployment. Perhaps Matt might admit that the evidence is lacking, but argue, like James Heckman that we should still accord priority to the standard economics 101 story.

In the absence of better data, and better measurement frameworks, prior beliefs will continue to dominate how one interprets the evidence. This is not as much about dogmatism or conspiracy as it is about good science. In the absence of empirical evidence, logically consistent stories that accord with intuition have great appeal. At both an intuitive level and at the level of formal economic theory, incentives matter. If a person is paid not to work, the person will likely not work. If the costs of hiring a worker rise, fewer workers are likely to be hired.

However, this seems neither an attractive nor a compelling approach to me. A logically consistent story that accords with intuition plus four dollars or so will get you a horrendously overpriced venti latte at Starbucks.

The lesson here is straightforward. Simple economic models can be quite useful, but they should be employed with very considerable caution. In particular, one should always think carefully about whether the assumptions of your model blind you to factors that are important to the debate that you are applying them to. As a secondary matter, you should also look to the empirical support for your model – intuitively appealing models are frequently wrong.

As Deirdre McCloskey argued before she went loopy, one shouldn’t think about economic models as scientific proofs of anything. One should instead think of them as a particular form of rhetoric, where the parameters one picks at the start will have profound influence on the outcomes one predicts. If the math is right, the conclusions should be compatible with the starting assumptions, but that is about all one can say (internal consistency, while a good and useful thing, is obviously no guarantee whatsoever of external validity). More pungently, as dsquared put it many years ago

I’m pretty sure that it was JK Galbraith (with an outside chance that it was Bhagwati) who noted that there is one and only one successful tactic to use, should you happen to get into an argument with Milton Friedman about economics. That is, you listen out for the words “Let us assume” or “Let’s suppose” and immediately jump in and say “No, let’s not assume that”. The point being that if you give away the starting assumptions, Friedman’s reasoning will almost always carry you away to the conclusion he wants to reach with no further opportunities to object, but that if you examine the assumptions carefully, there’s usually one of them which provides the function of a great big rug under which all the points you might want to make have been pre-swept.

To be clear – I don’t for a moment think that Matt is Milton Friedman. But I do think that he has internalized some Friedmanesque ideas over the years. Starting assumptions have consequences. And when one starts with a family of models that presupposes no real hierarchy in the workplace, no distributional struggles over how bosses treat workers etc, one isn’t likely to get results that are helpful or relevant to aforementioned problems of hierarchy, bosses’ treatment of workers and so on. That’s a real problem.

Update Alex Tabarrok responds vigorously and inadvertently provides me with a very nice illustration of the problem that concerns me. After huffing indignantly about how “Henry seems to think that economists have never thought about their assumptions or tested their models” (I actually never say, nor imply this), he discusses a couple of Gruber papers which indeed appear to show a substantial wage-benefit substitution effect, and then gives us this.

And, dare I mention it, here is Joni Hersch in a recent paper in the AER on sexual harrasment:

Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.

Henry goes wrong because he doesn’t want to conclude that sexual harassment is ok but he thinks that the only way to deny that conclusion is to deny that wages are higher so he rejects the model, he rejects the assumptions that he thinks (incorrectly!) are driving the model and he assumes without looking for any evidence that wages are in fact not higher. (Talk about being blinded by assumptions!).

On the general question, see Peter Dorman. On the specific question of sexual harassment, an ungated version of the relevant article is available here for those who don’t have subscriptions to the AER. It’s indeed a remarkable piece. One of Alex’s commenters suggests that the author doesn’t do anything to convince anyone that the causal story is a good one; this is (very, very slightly) unfair. The author does mutter a bit about not having an instrumental variable, and waves vaguely in the direction of a strategy to identify causation. But what she does not do, at any point whatsoever, is to think about whether or not complaints about sexual harassment serve as a good proxy for actual sexual harassment in the workplace. As Alex’s commenter notes, there is a strong case that the causal story is precisely the reverse of what the author claims to have found- less well paid employees may be less likely to complain about sexual harassment. Not only that, but this prima facie provides a much better explanation of the findings than the author’s own argument. This bit from the paper is genuinely priceless.

The log wage difference between a job with zero sexual harassment risk and a job with the mean sexual harassment risk is 0.0155, or about 25 cents per hour for women, and 0.0252, or about 50 cents per hour for men. The large compensation for sexual harassment risk for men is surprising. One possible explanation is that since men infrequently file sexual harassment claims, those claims that are filed are particularly egregious, and exposure to such risk warrants a larger compensating differential than received by women.

So, on the one hand, we have a Tabarrok-world story in which power relations don’t exist, everyone is contracting fairly with everyone else, people are compensated for the higher risk of sexual harassment in particular industries with higher wages, and men demand and receive particularly high compensation for the risk of being sexually harassed in harassment risky industries. I don’t think that this claim passes the laugh test, myself. Clearly Alex disagrees, and I look forward to his fuller explication of this quite striking empirical finding. On the other, we have a story in which different levels of industry compensation are associated with different levels of bargaining power and reinforcing social norms, so that the likelihood of reporting sexual harassment varies substantially with compensation. This provides a far more plausible explanation of the awkward finding (it’s prima facie believable that working class guys are less likely to report sexual harassment, especially by male supervisors, than are men in better paid professions), but one that is invisible to a particular kind of economist, with the accompanying set of intellectual biases, for whom, as Alex so amply demonstrates, this is further evidence of how markets compensate for sundry forms of unpleasantness. “Talk about being blinded by assumptions!” how are ya. It perhaps says something more general about the economics profession that this paper got published in a high impact journal, despite its obvious problems (although in fairness, while Alex doesn’t mention it, the paper appeared in the AER’s annual papers and proceedings round-up rather than in the more strictly refereed part of the journal).

Of course they do: but this works all ways, not just Friedman’s. If we assume away Public Choice then we’re going to get very different answers about what is a good or interesting legislative proposal than if we assume Public Choice. And so on with any starting assumptions.

Harking back to the Red Plenty thread and Cosma (??) on the computing required to plan in detail. If we assume that planning is possible then we end up with a 70 year economic monstrosity: if we assumed at the start that such planning was not possible then we’d have had a different experience.

Assume that teachers’ unions are out to screw the general public for the benefit of teachers and Wisconsin looks a little different than if we assume that Walker is simply some Koch funded destroyer of all that is right and good in public service.

As an entirely personal point I’m convinced that almost all economic disagreements are precisely because of different starting assumptions usually guided by differences in morals/prejudices. Fortunately I know where I stand for I really am out to screw the workers……

In the absence of evidence, what’s your proposed alternative to defaulting to the Econ 101 story? Is there an equally-plausible Crooked Timber theory that we can default to instead? Should we just try passing regulations without any theoretical response and see if they work?

‘This is not as much about dogmatism ….as it is about good science. In the absence of empirical evidence, logically consistent stories that accord with intuition have great appeal.’

I think you will find that before the creation of ‘good science’ ‘logically consistent stories that accorded with intuition’ were pretty much all we had. And obviously despite these stories’ ‘great appeal’ I’m not convinced that the decisions based on these stories lacked ‘dogmatism’. . No matter how much they ‘accorded with intuition’.

Well, you could start by recognizing that your conclusions depend on the validity of your assumptions. And you could reject hypotheses that were contradicted by empirical data – regardless of how well they might comport with “common sense” and “intuition.” Aristotelian physics is intuitive but wrong; Newtonian physics breaks down in the realm of high velocity, high acceleration, or on tiny physical scales.

If that sounds too obvious, it isn’t. You’d be surprised by how often people forget this.

“If bosses were given greater freedom to coerce their employees’ political behavior, that would almost certainly increase incomes at the bottom end (in effect you’d be letting poor people sell votes)”

Says Yglesias. I am very skeptical that it works that way at all. What’s more likely is that all the bosses sue their new-found freedom to coerce employees’ political behavior, and wages stay exactly the same.

What’s this “full employment” thing anyway, and why does it necessarily improve my bargaining position? Suppose it’s bless’ed full employment, and Yglesias is employed too, shoveling manure all day long. Then, by an incredible strike of luck, he gets a gig at Slate. Is he in a great bargaining position now?

‘”In a frictionless marketplace regulations would reduce wages but with frictions it’s likely to increase long-term unemployment which is worse in social welfare terms.
is quite striking. “

It is even more striking, because the back-up claim in the second quote (above) has no compelling empirical support. Comparisons across advanced industrial democracies find no evidence that increased labour market regulation (including a variety of regulations that one might expect to have much more direct consequences than e.g. body searches) lead to higher unemployment. ‘

To say the point being made has no ‘compelling empirical support’ is therefore an extremely polite way of putting it. A much more cogent and accurate way of putting it would be ‘it is false because it does not accord with the relevant empirical data’.

So there is no absence of evidence per se. What there is, is an absence of evidence that |supports the ‘official story’ which is a rather different issue.

In comments to the previous post, Markets and Freedom: Common Mistakes, temp and I have had a lengthy and, perhaps tedious, exchange on this question of whether the “classical” or Econ 101 model, properly, applies.

I think it clearly doesn’t. The assumptions entirely preclude meaningful (or more important, functional) analysis of the “Do as the boss says, or you’re fired” employment relation, imho. I think you need a model that explains why that employment relation is so common and how it works as an economic mechanism, what the economic benefits of it are, before you have a analytic context, in which to reason out the advisability of introducing particular government regulations. MY’s (or temp’s) insistence that the classical model (of supply and demand balanced by market-clearing prices achieving allocative efficiency, amid perfect information) is sufficient or even applicable creates an epistemic problem, where it is really, really hard to have a sensible discussion centered on consensus reality.

The dialogue feels to me a lot like the old Monty Python joke about the dead parrot. One side points to all kinds of realistic evidence that the parrot is dead, and obviously so, and the other side filters each claim tendentiously through a model that says, the parrot is alive.

The “Do as the boss says, or You’re fired” employment relation is not one, where pay varies, with the demands placed upon the employee. Holding a price fixed is very, very common in the actual economy. No one expects the price of an iPhone to vary, and it doesn’t. The price of a movie ticket isn’t usually higher for a good movie, than for a bad one. It’s not that prices do not ever change, in response to good ol’ Supply and Demand; the thing is that prices are administered, and most of the action is in the bureaucracy’s working on issues of technical, not allocative, efficiency. The price of the movie ticket is unvarying, but the theatre and the studio will administratively and strategically work on things like how many theatres a popular movie is in, or how a movie is promoted, etc.

In the supermarket, prices do vary, but on an administered schedule, managed with promotional advertising, coupons, etc. There’s a lot of effort to capture consumer surplus with price discrimination, and holding prices fixed can be critically important to the ability of retailers and/or manufacturers to learn about the elasticity of demand, which they need to do, to price (discriminate) effectively.

My point is, that the “Do as the boss says, or you’re fired” employment relation is particular to an administrative hierarchy — a bureaucracy. The wage is being held fixed, and the critical incentive is supplied by a rule-driven distribution of risk. And, the payoff are gains, not in allocative efficiency, but in technical efficiency and productivity. This is, famously, in Knight, so this is pretty conventional, even
traditional economics, and not a fatuous claim that economists simply have it all
wrong, because people are not rational, or whatever.

The claim that the employees subject to search would be better compensated is particularly troubling. Under the “Do as the Boss Says, or You’re Fired” regime, additional compensation would not be offered, because that’s not how that regime works. All kinds of variations in tasks and working conditions can be introduced, with no change in pay. This is an incomplete contract, which is being continuously re-negotiated in terms of employer requirements, but not renegotiated in terms of employee demands. That’s the nature of the deal. It might be a good deal for good economic reasons; reduced transactions costs, or, as I might argue, the ability of managers to achieve technical efficiencies (or reduce inventory losses with searches of employees). But, it is that asymmetric aspect of the deal, which creates the possibility of being asked for a blowjob, or to submit to some b.s. search without proper consideration of the subordinate’s interests or dignity. It seems to me that MY refuses to come to grips with that detail of how the “Do as the Boss says, or You’re Fired” labor relation, and insistence on the classical model is his means for avoiding the central issue.

Classical reasoning insists that the compensation differentials, to offset the burden on employees of, say, the b.s. searches, and/or the improved efficiency associated with reducing losses to theft, will emerge in the wash of general equilibrium adjustment. It is a little hard to confirm such alleged general equilibrium adjustments with actual observation.

But, let’s say, we do concede, for the sake of having an argument within a common set of terms, that we can usefully abstact away from details of the case, and use the classical models. I don’t see why classical models of monopoly/monopsony don’t apply, as a (at least a crude) representation of the power imbalance, between employer/manager and subordinate employees. Full-employment is a pretty crude way to address monopsony power, particularly the monopsony power of employers to take a strategic, “take it or leave it” approach to offers of employment. And, it brings us back to the question of whether MY has a coherent theory of politics. If the mass of employees could elect a government, which ensured full-employment sufficient to undermine employer monopsony, they could also elect a government, which could make regulatory interventions to improve the welfare of employees and the efficiency of the workplace, and should, since such targeted policies would be independently and additively effective.

MY writes a lot about real property: taxes, zoning, parking, private vs. public functions, etc. Although his thinking is somewhat libertarian on these issues, it is often insightful.

When MY thinks about employment, he runs down into Econ 101/libertarian ruts that appear completely divorced from the real world.

I think this because Matt really doesn’t understand the importance of a job to most people, and the catastrophic effects of not having one. He writes as if losing a job and getting a new one is on a par with finding a new apartment after your lease expires. This leads him to ignore the power imbalance between employers and employees, particularly in times of long-term high unemployment.

bq. My point is, that the “Do as the boss says, or you’re fired” employment relation is particular to an administrative hierarchy—a bureaucracy.

This is exactly the point that much institutional economics can’t deal with – there is a persistent tradition of analyzing the firm as a nexus of market contracts and nothing more, without any attention to hierarchy. And this is, of course, Ronald Coase’s other major (and misunderstood) contribution to economics – pointing out that firms actually operate internally according to a non-market logic (which is not to say that his approach, or transaction cost economics works – it doesn’t, for other reasons). In fairness, I should point out that this is an issue where I’ve had some useful exchanges with Matt in the past.

Workers have more bargaining power if there is a surplus of jobs and a shortage of workers to fill them, as oppsoed to there being (like now) not enough jobs to keep everyone employed. Supply and demand . . .

@Aaron Swartz“In the absence of evidence, what’s your proposed alternative to defaulting to the Econ 101 story? Is there an equally-plausible Crooked Timber theory that we can default to instead? Should we just try passing regulations without any theoretical response and see if they work?”

The problem with the Econ-101 story is that while it does allow one to tell a coherent story, there are a lot of auxiliary assumptions built in. Okham’s Razor would suggest one use the simplest coherent story with as many assumptions consistent with known facts as possible. Economists usually restrict the allowable evidence to a very narrow domain, but there is no reason for policy makers to do so. They can always look for a coherent story that is, as much as possible, consistent with what is known about the behaviour of people in the given or similar context and the workings of relevant institutions. eg. admit as evidence what psychologists or sociologists would or even what commonsense would.

(Hmm, too abstract without any specific examples but hope it gets the point across)

“I think this because Matt really doesn’t understand the importance of a job to most people, and the catastrophic effects of not having one.”

But doesn’t the logic of this say we should care less about improving the workplace condition of those with jobs, and more about helping the unemployed to get jobs? In other words, fewer workplace regulations, but full employment – which is exactly Yglesias’s argument.

“It is even more striking, because the back-up claim in the second quote has no compelling empirical support. Comparisons across advanced industrial democracies find no evidence that increased labour market regulation (including a variety of regulations that one might expect to have much more direct consequences than e.g. body searches) lead to higher unemployment.”

It depends on whether you compare like with like. For example when you exclude countries rich in natural resources, tax havens, finance centers etc and countries that are experiencing other labor market trouble such as recession or economies in transition where unemployment is going rapidly down or some other unconventional movements in the data due to transition econ 101 does pretty well in explaining the effects of labor market regulations for the OECD-countries in 2o07: countries with more regulations have higher unemployment. If you want to check this quickly just exclude the countries with unemployment above 8.5 and below 4%.

When on the other hand, as what the authors seem to do in the paper you cite, you compare usual countries to unusual ones then you’re going to get unusual results.

My point is, that the “Do as the boss says, or you’re fired” employment relation is particular to an administrative hierarchy

I’ve noticed that the original proposition – “Fuck me, or you’re fired!” – that got the libertarians all twisted up inside has evolved now to “Do as the boss says, or you’re fired!”, of which the above is just an example.

This is misleading and possibly disingenuous change. The latter proposition isn’t on the face of it unreasonable. Your employment contract requires you to do a certain job, and odds are there is a boss who tells you, more or less, what to do.

The big question is what are the implied parameters of doing a certain job, and the argument with the libertarians is who should be the person (legal or natural) who decides. “Fuck me or you’re fired!” is way outside what most people would imagine are those implied parameters, and watering the example down is in danger of invisibly conceding a big chunk of ground to the libertarians.

@16: Why is “fewer workplace regulations” the solution? As opposed, for example, to “very high taxes on the wealthy”, thus encouraging corporations to divert less money to management and more to workers? Or “extremely high inheritance taxes on huge estates”, to prevent vast inherited differences in wealth from buying political influence and making themselves self-perpetuating? Or “free public universities for talented students from all economic backgrounds”, paid for by the items above?

Isn’t the economics of regulation pretty straightforward? You know, transaction costs, incomplete contracts, incomplete information, prisoner’s dilemma, Robert H. Frank’s status stuff, etc. None of this is hard. It’s a bummer that libertarians can get people so knotted up so easily with so little. I’d rather start with a socialist baseline and work from there, but it’s not hard to get to where you want from a libertarian baseline either.

We can talk about various types of efficiencies every day forever if we want, and I’m sure those are very important, but fundamentally, the dude trying to coerce a female underling into blowing him is a bastard coated bastard with bastard filling. Which is another way of saying that sometimes people will do bad things just because they can, because they’re bad people and the punishment for being a bad person is often nothing at all. Being a bastard of an employer is particularly egregious (and worthy of prohibition) because you have a large amount of power to damage a person materially.

Martin why should countries undergoing a recession be excluded from the discussion?

I think Martin’s point is that at full employment, neither employee nor employer as any market power so that the econ 101 story can be taken seriously. In periods of recession or more than full employment (e.g., the US in the late 1990s), one side or the other does have market power and can extract rents. Outside of these periods (i.e., very occasionally) either employees or employers (much more frequently the latter) can extract rents which can take the form of ridiculous demands (e.g., FMOYF).

My understanding of Martin’s assertion is that if neither side has market power, if the market is competitive, then prospective employees are able to find reasonable jobs at a competitive wage w/o having to suffer degrading conditions. Whether or not this is the case is another matter and of course depends crucially on where we define full employment.

I meant to add that (as I understand him, if I may so interpret the gendered name) Martin follows Keynes in believing, or being willing to stipulate, that at full employment, the standard model (“econ 101″) comes into its own: regulation throws sand in the gears of market efficiency. The only reasons it might be necessary to improve economic efficiency are either externalities or issues of public goods.

I’m smiling, because if “transaction costs, incomplete contracts, . . . etc.” is “straightforward”, then the term doesn’t mean what I think it means.

One of the consequences of bouncing back and forth between analytic models that are so simple, because their assumptions abstract away from every detail that might matter, (e.g. perfect competition and complete information), and analytic models that seem to stuff all the details that matter into a formless blackbox (e.g. transactions costs), is that we cannot talk straightforwardly about these problems, as if we lived with our interlocutors in a common reality.

OK, Bruce, you’re right. What I should have said was, “here’s a list of well-known things that confound the laissez-faire view.” I don’t believe for a second that game theory or whatever can calculate the optimal workplace regulation, but it does help refute brain-dead libertarian antics. As does your old-school institutionalism.

Basically what Marcel said: there is little point in comparing countries that are in a recession or have other economic problems to countries that don’t have said problems when it comes to comparing the effects of labor market regulations on unemployment.

When doing cross-country comparisons you have to compare like with like so as to be able to compare the difference in unemployment due to the difference in labor market regulations.

For anyone who wants to play around a bit with labor market regulations and unemployment I’d recommend having a look at http://stats.oecd.org/. There is quite a bit of data that’s easily downloadable in excel.

An example so egregious and specific can be extracted away (or buried in) from its social, institutional, and cultural settings and causes, and leave you nothing left when the boss asks to but his anniversary present or babysit his kids except:”Not demanding sex.”

To correct you though: the story has little to do with market power on either side of the market. You are right though that market power could change circumstances, however the market power of employees vs. employers is so very much interwoven with labor market regulation that does not matter very much: i.e. labor market regulation is probably the main determinant of market power to the exclusion of much else.

The reason to exclude countries in recession is simply that most countries (in 2007) are not and that recessions are weird. So even if all countries were such a comparison would be problematic IMO. In that sense you’re spot on with Keynes; I do implicitly use the Samuelsonian Neoclassical Synthesis here: econ 101 is safe to use outside depressions/recessions.

>However, this seems neither an attractive nor a compelling approach to me. A logically consistent story that accords with intuition plus four dollars or so will get you a horrendously overpriced venti latte at Starbucks.

Exactly. Higher labor costs will not lead to less workers being hired when it does not change the number of units produced to maximize profits due to monopoly control over the product which is consumed (via brands). To be completely accurate it might result in a very tiny change, but higher labor costs or more workplace regulation can easily lead to a net positive gain for workers as a whole.

This still, however, does not help unemployed workers nor does it prevent workplace unfairness which is not covered by regulations. As the “red herring” post pointed out, the best way to help labor is full employment.

Katherine @ 20: “I’ve noticed that the original proposition – “Fuck me, or you’re fired!” – that got the libertarians all twisted up inside has evolved now to “Do as the boss says, or you’re fired!”, of which the above is just an example. This is misleading and possibly disingenuous change. The latter proposition isn’t on the face of it unreasonable. Your employment contract requires you to do a certain job, and odds are there is a boss who tells you, more or less, what to do. The big question is what are the implied parameters of doing a certain job . . .”

Yes. The big, continuing political question is, what are the legitimate parameters of the job?. That’s in the nature of an incomplete contract: there’s a continuing negotiation over the legitimate parameters, while the variable of compensation is held, more or less fixed.

And, the boss’s request for sexual intercourse would seem to be an easy case. It is not a case that MY or the libertarians seemed to be equipped to answer, and that’s telling about their model of how the economy works.

Using the methodology of the previous paper, and focusing on the central estimate, the final toxics rule is forecast to have a modest, positive net impact on overall employment—likely leading to the creation of 84,500 jobs between now and 2015.
The net 84,500 jobs created by the toxics rule are the result of “cross-cutting” effects. More specifically:

8,000 jobs would be gained in the utility industry itself.
80,500 jobs would be created from pollution abatement and control investments.
32,000 jobs would be displaced due to higher energy costs leading to price increases in energy-using sectors, thereby reducing demand for their output.
28,000 jobs would be created due to “re-spending multipliers.”

Applying less-pessimistic and more-realistic assumptions reduces the jobs displaced by higher energy costs by roughly 40–100 percent. Taking the approximate midpoint of this range, only 10,600 jobs would be displaced due to higher energy costs2—raising the number of jobs created by the toxics rule to 117,000. This is the preferred single estimate of the job effects of the final toxics rule.

Bruce Wilder and chrismealy hit the nail on the head in terms of the question “can we use econ 101 style thinking to talk about labor markets.” Labor economists actively engaged in the field would be extremely unlikely to model a labor market for an academic paper like MY does here. Yet in discussions of economics in the punditocracy (and by that I mean op-eds, blogs, the sort of writing people see on a day-to-day basis if they aren’t research economists), these econ 101-style toy models are exactly what’s frequently deployed. My experience is that researchers frequently do what Henry suggests in the(“Simple economic models are useful…” paragraph. In my classes, I always stress that the assumptions are, and should be(!), the most contentious part of any economic model. That emphasis on thinking carefully about assumptions doesn’t seem to translate well to the type of communication prevalent on the Internets.

Side comment- One mystifying aspect of the internet to me is the prevalence of people spouting Austrian/libertarian economic arguments despite the fact that Austrian/libertarian economists are about as common as Marxist economists in academia (that is to say, an endangered species). I’ve seen some attribute it to the fact that this style of economics appeals to people who disproportionally use the internet. An alternative explanation that also makes sense to me is that Austrian/libertarian arguments are far more amenable to blog and comment style arguments, but get ground to bits in long-form peer-reviewed journal articles.

Martin – have you read the paper beyond skimming to the first couple of graphs? I find it hard to recognize the main argument of the paper – that the econometric results ‘supporting’ the story that labour regulation leads to higher unemployment are completely insufficient to provide proper evidence – in your summary. It’s notable that Heckman, who is neither exactly a slouch at econometrics, nor ideologically inclined to accept the paper’s arguments not only agrees with this set of criticisms but amplifies them. The argument between Heckman and the paper’s authors is about how to interpret the lack of econometric support for economists’ conclusions – not about whether the existing econometrics support it. If the paper were based around a simple and mistaken failure to exclude inappropriate outliers, I rather suspect that Heckman would have had something quite sharp to say about it.

“that the econometric results ‘supporting’ the story that labour regulation leads to higher unemployment are completely insufficient to provide proper evidence”

Right, but Henry, this doesn’t mean that there’s “no evidence” that tighter labor-market regulation leads to higher unemployment. It means this one paper, written by people ideologically supportive of tighter labor-market regulation, interprets a series of fuzzy econometric studies to arrive at the conclusion that tighter regulation doesn’t matter. This one paper hardly settles the question.

Bruce, my point was that the premise has slipped. That the libertarians were umming and aahing about an obvious case of abuse of power was extremely telling. Letting the premise slip to an unnamed “do this!”, whilst it may assuage discomfort about having talk about sexual exploitation of female employees by male bosses, rather takes the focus away from the fact that libertarians honestly didn’t know whether or not “fuck me or you’re fired” was something that should be stopped.

“no evidence” was too strong and was sloppy wording on my part – the formulation in the previous sentence, “no compelling empirical support” is one that I would stick to (and again – Heckman is in entire agreement on the weakness of the entire econometric literature).

In my experience, poor supporting evidence doesn’t necessarily imply that a model is invalid. More often than cases where data provides some sort of contradicting deathblow, I see data that indicates that we have a model of how many angels can dance on the head of a pin. That maybe, at some level of detail, the modeled effects matter, but the things that are most important in determining outcomes are things we hadn’t even considered at first. Over and over, the things that we thought should be important were not, and we usually find the things that are important by looking at the data.

Admittedly, I can talk like this because I have the benefit of working in a field where it is much easier to test than economics, but modeling is still usually cheaper than testing, so there is always pressure to use models where we can get away with it and test only to validate. That said, I think my experience is probably generally applicable insofar as humans tend to have practical myopathy but imagine they have the capability to intuit broadly. Models, used without care, seem to often just enhance that false confidence.

And, the boss’s request for sexual intercourse would seem to be an easy case. It is not a case that MY or the libertarians seemed to be equipped to answer, and that’s telling about their model of how the economy works.

I don’t think it actually says anything one way or the other about how their model of the economy works. It’s more about how their model of human psychology works. People who try really, really hard to find ways of excusing “fuck me or you’re fired” are generally people who just don’t think it’s that big a deal. But that’s not an ok thing to say, so what they do instead is hide behind complicated models when all you need is a little imaginative empathy (h/t Belle) and decency.

You are assuming that there isn’t any real distributional action happening within the firm – and in particular, that the firm’s owners don’t have any surplus (that they are able to extract because e.g. of workers’ weaker bargaining position) that could be reallocated through regulation.

Is this true? I think it’s consistent with Yglesias’s model that:

1. A firm with market power can collect profits (surplus) which could be distributed to workers through some regulations e.g. unions or higher minimum wage
2. The particular form of regulation under discussion serves primarily as a restriction on the composition of compensation, without improving the employee’s negotiating position or restricting employers in terms of total compensation, and therefore will not serve a redistributory function

What do you think would happen if the government mandated that employers contribute a specified amount to employer pensions, without changing anything else? Would cash wages go up or down?

“What do you think would happen if the government mandated that employers contribute a specified amount to employer pensions, without changing anything else? Would cash wages go up or down?”

Well, at my wife’s place of employment, this is exactly what happened when they got bought out by a larger firm. Current wages dropped because the new company had a fixed contribution to employee pensions. Pay me now, or pay me later. Following that, a whole slew of annoying rules restricting workplace activities were instituted and employee responsibilities were increased to cover people let go in the merger of the two firms, and amazingly, weages did not increase. WHO COULD HAVE KNOWN!?!11?!

Or perhaps a “shorter” would suffice:
Deferred compensation in the form of pension contributions is exactly like being asked to have sex with your boss.

Henry, there’s something I wonder if I’m misunderstanding. I’m wondering how something like “no cavity searches” should be considered a costly right. It’s not like when you set up a business, you automatically get into searching employees’ anuses and vaginas. It takes managerial time to set up a scheme, or decide which of several offered schemes to purchase the use of, and money and resources to operate. Employee stress has readily quantifiable costs, including impaired efficiency and productivity and increased turnover. Now, I’m sure there are situations where the rewards offset all that…but I’m equally sure that a lot of the executives setting up such things are not interested in weighing the real costs and gains, and are doing it for reasons that have nothing to do with greater return for the business as it actually is.

Likewise for stuff like constantly shifting weekly schedules in retail. Fixed or slowly and reliably rotating shifts would take less of the manager’s time, reduce opportunities for employees to make mistakes about their hours, and provide benefits of predictability for all concerned. But reliable scheduling is treated as a bonus to employees rather than shifting schedules being a penalty the employer is imposing on themselves.

And of course in the case of “fuck me or you’re fired”, all it takes is the manager saying to the employees he finds sexually attractive only what he says to all the others. No further action is called for on anyone’s part. It is, in the most abstract theory, imaginable that employers who gratify themselves via undesiring but compliant employees make gains in productivity or whatever that offset the costs imposed on employees (and the reputation of the firm as a whole, and so on). I feel quite sure that nobody dithering about whether we should prohibit bosses from doing this can point to any real evidence that it is so, particularly if we compare managerial performance at firms where this sort of abuse goes on versus ones where it’s rooted out.

All of these, and a bunch more, seem to be costly benefits only if we assume that businesses are compelled to do the shitty thing in every way imaginable and must make a conscious costly effort to do anything better. I don’t get that. Am I missing anything?

The first middle class was created in the wake of the Black Plague. With substantially fewer peasants (and a fewer lords to lord it over them) the remaining peasants simply left for the cities and nobody could stop them. The ones who remained charged higher wages for their services. Bad times for the landed gentry. The kings of the time responded with wage and price freezes. The old medieval world was gone.

I wonder if every middle class has arisen as a response to some sort of disruption of this sort. If wages rise, it’s because there’s competition for skilled labour. Even the peasant knew how to manage draft animals, plough, sow, cultivate, harvest. How many of us could manage that stunt today?

There’s an endemic problem in China at present: workers, especially in the construction industry, are being cheated of their wages. Not merely underpaid, but not paid at all. Without some underpinning at a contractual level, some arbiter, the whole system breaks down. The great motor of Chinese economy has no oil in the crankcase.

The metaphor of “friction” in the system is itself a red herring. Markets require regulation and have been regulated since Hammurabi, whose famous code established the wage for shepherds and shipbuilders, the requirement for receipts, titles, land leases, all concepts we understand today. How can a market be “frictionless” ? It’s an oxymoron. Regulation is a market lubricant, separating winners from losers with brisk efficiency. Without such regulation nobody will participate in markets. The need for regulation rises proportionately with risk.

If society wants efficient workplace regulation, the answer seems fairly obvious. The Germans have the Betriebsräte, I suppose you might call them worker’s councils, from which workers’ representatives can be put on the Aufsichtsrat, one of the two boards of directors for any publicly traded firm. It’s not a perfect system, but it’s a working mechanism for negotiating worker rights, where it matters, at the board level.

Bob McManus – you’ve looked to get yourself banned from this blog for quite a long time. If I see more offensively sexist comments from you along the lines of the one in moderation, you’ll get your wish. Consider this a warning.

46. His point is that women are liars who lie. People should check out that article, it is a doozy. Here is some of it’s advice for identifying cases where women are lying about rape.

“”””””” In discussing the alleged rape, false accusers may be unable to provide detailed descriptions of the rape or may provide too much detail. Although a significant number of true rape cases include numerous sexual acts in addition to penile penetration, those fabricating allegations of rape tend to describe very limited and narrow sexual activity. “”””””””

Maybe we should file this under “why women don’t comment on these threads”.

In the US we had low unemployment in recent memory – not full employment, but sufficiently low that it challenged theories of the natural minimum rate. And yet we got intrusive behavior by employers and stagnant wages for the middle class. Incomes for the very wealthy soared.

Misaki @48: In the United States, “fuck me or you’re fired” is illegal. The law is enforced, to the extent it is enforced generally through sexual harassment lawsuits, and through employers privately enforcing their own anti-harassment policies either from fear of being sued or because having your supervisors and managers giving preferential scheduling and the like to people who are blowing them, or firing good workers who refuse to, is not in the company’s best interests. The company I work for, for example, has been known to fire people against whom credible claims of sexual harassment have been made.

>In the US we had low unemployment in recent memory – not full employment, but sufficiently low that it challenged theories of the natural minimum rate. And yet we got intrusive behavior by employers and stagnant wages for the middle class. Incomes for the very wealthy soared.

etv13:
>In the United States, “fuck me or you’re fired” is illegal. The law is enforced, … The company I work for, for example, has been known to fire people against whom credible claims of sexual harassment have been made.

oh, well that’s good.

I think it’s been pretty well-established in the discussion which this blog post is a part of that “libertarian” principles work much better with full employment… which of course, was the whole point of Matt Yglesias’s ‘red herring’ post. As merian pointed out in 54, regulations of the work contract are less necessary in an environment where workers can be trusted to uphold a fair work environment. I assume anyone who is interested in the actualization of libertarian ideals is, therefore, prepared to devote an appropriate amount of effort toward full employment, like the solution linked above.

Could it be the wage rises of the late 1990s were spurred by a disruptive force such as the rise of the Internet? It led to numerous downstream disruptions: Amazon, Google, online banking and the like.

US capital markets in the 1990s attracted much of the world’s wealth. Since then, those dollars have gone elsewhere. The USA faces more competition. The Great Recession of 2008 pared down competition further: the remaining employees who survived the bloodbath aren’t the nice little people who used to key loan applications into the mainframe. Those jobs are gone. They went elsewhere, and it’s pointless to grieve over them.

The numbers which concern me most are income inequality, one measure of it is the Gini coefficient. Unemployment comes in many forms, I’m not sure what passes for unemployment statistics gives us a true picture of how bad things are out there. The wages of the waiters and cooks and folks who pluck chickens are so low we might say they’re subsidising the lifestyles of folks upstream. Capitalism aggregates wealth as surely as gravity cleared out this solar system, condensing it into a star and planets and whatever they’re calling Pluto these days. That’s the only working model for what’s going on here.

When Bismarck perceived the threat of Communism, he empowered the workers to stave it off. Trade unions, social benefits, pensions, medical care. Not that Bismarck gave a damn about those people, he didn’t. But Bismarck correctly perceived what would happen if he didn’t inoculate Germany against Communism. And there was that little matter of all his talent emigrating to America. Had to stop that, too.

@Tom BachIn east central Europe the entrenched elites increased their power over serfs in the Plaque’s wake. How does your theory account for this fact of history?

In the time of Edward III, the Statute of Labourers (1351) enacted wage and price freezes and made migration illegal. It would lead to the Peasant’s Revolt of 1381, Wat Tyler’s Revolt. Though the revolts were put down, the economic landscape had changed too much to ever return to the status quo ante of serfdom. Though the elites did increase their power, they never slept comfortably in their beds thereafter. Wat Tyler had tightened every titled sphincter in the land.

… and may I add, as an afterthought, when Communism did arise, it only afflicted those portions where feudalism remained intact, as in Russia and China. Frank Zappa once observed “Communism will never work. People want to own stuff.” Communism can only appeal to a man with nothing, Mao Zedong said “Every landless peasant is already a Communist.”

212 out of 1,218 is 17.4%. Add that to 27% and you get 44.4%. Do you really think an article with that much work put into it, by someone with the credentials “PhD, JD, MBA”, is going to make a basic arithmetic error? I do agree that the wording is slightly confusing, and the way the bolded part focuses attention on what immediately came before does not help, but that formatting is in the original so I thought it appropriate to retain it. To be clear, “these complainants” in the quote refers to the 1,218 reports, not the 546 unsolved cases (I assume the complainants were all female but you never know…).

Give me a sec to pick myself up from the floor, get that giggle under control and put on a hazmat suit.

Point one, while the original paper quoted by your initialism-rich author isn’t available on the internet, others quote it, too, and in several places I see the 27% applied to 566 (not 546), not the total number[1]. So 17.4% of 1218 plus 27% of 566 is definitely not 45% of 1218. Sorry. And that’s all I’m going to say about that old misogynistic chestnut of rape-crying women that you’re singling out for no discernible reason because…

Point two, you’re the only one who seems to think that false accusations of the boss man is in any way a relevant obstacle to improving the dignity of workers despite the fact that the case you’re so concerned with IS already illegal AND against every conceivable company rule book. Plus, this started out as a hypothetical example where even the libertoonians were agreeing that it’s Not A Good Thing To Do, but were embarrassed because they just couldn’t argue why-on-Earth not from their peculiar theoretical framework. Where this is an actual, real-life problem, it’s not because employers or the countries in which they operate have no rules or structures for enforecement: it’s because the company culture protects the transgressors and silences the employees who find themselves targeted. In any sane cultural environment, this is a non-issue.

[1] As you can imagine, this old warhorse of a study is trotted out in rather unsavoury corners on the internets. According to those, after having identified those 30-or-so % of lying sluts, the authors then extract a few dozen of characteristics of “false accusations” and retro-fit them to the original 1218 reports to end up with a whopping 60% of lying rape-accusers. SRSLY. What a load of bullcrap.

“Martin – have you read the paper beyond skimming to the first couple of graphs? I find it hard to recognize the main argument of the paper – that the econometric results ‘supporting’ the story that labour regulation leads to higher unemployment are completely insufficient to provide proper evidence – in your summary.”

I have skimmed the “no evidence” paper you cited not what Heckman had to say about it. From what I saw in the “no evidence”-paper I inferred that the no evidence was based upon comparing like and unlike from the presence of countries in the sample I would not want to include together.

I think though what Heckman says – based on a cursory read – about that more theory is needed etc. dovetails pretty well with what I said above although I have sincere doubts that that means you should include countries such as Switzerland, Norway and others: you’d be testing more theories at once than when you would simply exclude these countries from your sample.

Finally, I’ll openly admit that my prior is econ 101 that more labor market regulation will cause higher unemployment so I could be said to be biased. Though I have contemplated that for example anti-dismissal laws could be beneficial as it could result in higher employee-investment in the specific tasks of the job leading to a higher return. The trouble with arguments like these is that there is little reason to believe why large companies with an extensive division of labor would not voluntarily write clauses into the contract to the same effect. Transaction costs are not exactly the problem there. The most likely explanation why beneficial clauses are excluded is ignorance and in that case there is little reason to believe that the legislator will know more than the contracting parties.

What do you think would happen if the government mandated that employers contribute a specified amount to employer pensions, without changing anything else? Would cash wages go up or down?

That’s exactly what has been happening in Australia since the early 1990s. The current required contribution is 9%. Wage growth has been positive since then, unemployment has generally been low (it’s currently 5%) and aside from a period of time when the government was tinkering with the kinds of industrial legislation that libertarians dream of, productivity growth has been positive.

I’m not a fan of these super contributions and I think they would have been better as mandatory pay rises, but I think it’s safe to say they haven’t created an economic or labour market catastrophe in Australia…

One recent development in the UK was the Beecroft report, in which a venture capitalist writing on behalf of the Conservative Party argued for the abolition of all unfair dismissal laws. One of the reasons this failed to get traction is that people argued that making employees feel more anxious about getting fired in the depths of a recession would make them much more cautious as consumers, prospective home buyers etc and this would further depress demand. Econ 102 perhaps?

Am I really the only one here that is nauseated by Misaki trotting out the bitches-who-cry-rape-and-mistreat-poor-helpless-guys strawman otherwise unopposed? Goodness, this is not what I expected on CT.

I’m not sure what the point is in posting it all, except to say maybe that apparently since women lie about being raped therefore there shouldn’t be any reason to stop bosses saying “Fuck me or you’re fired”?

Heckman (quoted in OP): “In the absence of empirical evidence, logically consistent stories that accord with intuition have great appeal.”

I don’t share Heckman’s intuition. In general, psychological egoism isn’t an intuitively plausible doctrine. It appeals to cynicism, not intuition. Heckman’s flaw seems to be to generalize from the fact that incentives SOMETIMES makes intuitive sense to a doctrine that we are econ incentive automata that react reliably proportionally to econ incentives.

merian @74: No, no you aren’t. My killfile has been getting a nice workout on these threads.

I would hope there’s a better case to be made about Employer I Mean Workplace Liberty than this kind of odious parroting/pasting, but the last few threads haven’t been very encouraging on that front. At least now we’re airing out some actual gender politics that badly needed it, I guess?

Shorter Misaki: Even if ‘FMOYF’ is bad, regulation would be worse because sly conniving women would use it to shaft their poor innocent bosses.

I’m almost starting to feel nostalgic for some of the earlier debates. Since this seems entirely irrelevant to the OP, and is clearly against the stated comments policy besides being offensive and offensively stupid, why are these appalling posts still here?

“One of the reasons this failed to get traction is that people argued that making employees feel more anxious about getting fired in the depths of a recession would make them much more cautious as consumers, prospective home buyers etc and this would further depress demand. Econ 102 perhaps?”

That depends on what theory of demand you subscribe to. If you for example believe that the Bank of England sets AD, then there is little reason to worry about such consequences.

To be honest the argument against implementing the proposal reads as a bit of a stretch. It reads a bit as: “For want of a nail the shoe was lost./For want of a shoe the horse was lost./For want of a horse the rider was lost./For want of a rider the message was lost./For want of a message the battle was lost./For want of a battle the kingdom was lost./And all for the want of a horseshoe nail.”.

The magnitude of that effect if any at all seems tiny to me and if it has any effect at all I doubt you can infer from it that it would have such large consequences as the loss of a kingdom/deeper recession.

Does that mean you should implement such a measure in a recession? No, the fears of the people are still very real and I doubt that in the short term it will amount to much: i.e. I am sure it can wait. It sounds more like pointless cruelty to my ears to do something like that at such a time.

“Fuck me or you’re fired” was a hypothetical example, from some libertarian essay; a thought experiment, abstract, conceptual musings. In real life, obviously, every kind of extortion, whether it involves money, sex, or any other services that a reasonable person would find irrelevant to the work functions, should be, and I’m pretty sure already is, a subject of criminal law. As well as filing a false police report. What else is there to say?

To Misaki: consider yourself banned permanently from CT for trolling as per our posted comments policy. Further comments will be deleted, disemvowelled, eater-of-meaninged or otherwise rendered harmless.. To everyone else: apologies that it took me 12 hours or so to read through the thread properly and see what was happening.

katherine @39 “libertarians honestly didn’t know whether or not “fuck me or you’re fired” was something that should be stopped.”

This seems completely false to me: the original post was a libertarian one one by Flanigan at BHL examining how from libertarian premises the FMOYF is unacceptable; then Chris Bertram objected to their motivations.

To give a quick summary:
the post at BHL said that FMOYF is unacceptable because it is way outside what the employer could have reasonably expected when she took the job;
Bertram did not like their reason.

I don’t know the first thing about the empirical evidence, but this, from Tabarrok’s post, strikes me as really odd: “What the theory and the empirical results are saying is that people exposed to a higher risk of sexual harassment are paid more.” Really? Maids, waitresses, barmaids? Or is this statement intended to apply only to comparisons within specific jobs (i.e. only waitresses, rather than waitresses versus lawyers), or specific kinds of workplaces (i.e. only waitresses in comparably scuzzy diners, rather than waitresses in scuzzy diners versus waitresses in high-class restaurants)?

misprint: the post at BHL said that FMOYF is unacceptable because it is way outside what the *employee* could have reasonably expected when she took the job.

BTW, I would add that I did not find a reasonable explanation from people at CT on why prostitution is morally acceptable, while FMOYF is not: Flanigan’s explanation seems fine to me, but Chris (and I think the other people at CT) did not like it; so: what is their take?
(apologies if it has been answered in comments).

Comparisons across advanced industrial democracies find no evidence that increased labour market regulation (including a variety of regulations that one might expect to have much more direct consequences than e.g. body searches) lead to higher unemployment.

What to make of this incredible claim? No evidence! I beg to differ. The cited paper studies many countries, including non-OECD countries, but please take a look at footnote 1 for references that study just OECD countries. See this too for more references. There are many other studies that arrive at similar conclusions. You may think that these studies are wrong. But this is clearly evidence.

Yglesias is pretty clearly right in the real world — if you had the choice, you would take (permanently) tight labor markets plus less labor regulation over more labor regulation and slack labor markets, right? The first increases the power of the worker and creates all kinds of decentralized pressures for better treatment, while the second gives more nominal power to the worker but greater actual power to the bosses and creates all kinds of decentralized pressure for worse treatment. The best that happens in the second scenario is that the labor rights are operative for employed workers who become a privileged in-group but there is an out-group of workers who are unemployed or employed in the informal economy and have great difficulty getting hired. BTW, for employment rights that affect the employer’s ability to fire workers the standard undergrad econ theory is *not* that these will increase unemployment, but that they will lower labor turnover and create more permanent in-groups and out-groups.

Yglesias is pretty clearly right in the real world — if you had the choice, you would take (permanently) tight labor markets plus less labor regulation over more labor regulation and slack labor markets, right? The first increases the power of the worker and creates all kinds of decentralized pressures for better treatment, while the second gives more nominal power to the worker but greater actual power to the bosses and creates all kinds of decentralized pressure for worse treatment. The best that happens in the second scenario is that the labor rights are operative for employed workers who become a privileged in-group but there is an out-group of workers who are unemployed or employed in the informal economy and have great difficulty getting hired. BTW, for employment rights that affect the employer’s ability to fire workers the standard undergrad econ theory is *not* that these will increase unemployment, but that they will lower labor turnover and create more permanent in-groups and out-groups.

not sexually harassing is more expensive than sexually harassing because a burger with fries costs more than a burger.

I would think that rules against sexual harassment would lower costs and increase productivity because people would not be distracted from their jobs by workplace sexual issues. Essentially it puts the state on the side of the owners in helping them discipline their middle managers and keeping their focus on work. I guess an alternative would be the idea that the owners want to pay their managers partially in sexual benefits. Anyway, it can get pretty bizarre, but it’s weird to think that it would be more expensive.

Yglesias is pretty clearly right in the real world—if you had the choice, you would take (permanently) tight labor markets plus less labor regulation over more labor regulation and slack labor markets, right?

Is there some kind of empirical evidence that labor markets are going to go all slack if bosses cannot coerce sex from their employees? Because otherwise I’d say this is a pretty false dichotomy.

I would think that rules against sexual harassment would lower costs and increase productivity because people would not be distracted from their jobs by workplace sexual issues. Essentially it puts the state on the side of the owners in helping them discipline their middle managers and keeping their focus on work.

Keeping your boss (or your co-workers, for that matter) from sexually harassing you is being on your boss’ side because you’re helping them increase productivity? Seriously?

Look, upper management has never had problems disciplining middle management. A company that has a zero-tolerance sexual harassment policy would just boot the offender out anyway. They don’t need laws for that. The reason we have such laws is precisely because organizations do not take such complaints seriously, and because women’s concerns are routinely ignored in the workplace. People who sexually harass others do so because they can and because the risk of being penalized is small (and used to be nonexistent), and their supervisors ignore the situation because they do not care. There is no complicated cost-accounting going on here, they just straight up do not care about these problems and thus find it more convenient to just ignore them rather than address the issue.

Managers at large companies routinely shaft shareholders; thus, it is not implausible to claim that in the case of sexual harassment the interests of owner and employees coincide (i.e.: they both gain if they get rid of sexual harassment); and similarly, for many other oppressive work conditions.
However, the claim can be tested by considering small companies where manager and owner are the same person.
Do women get harassed less or more in such companies than in large one? Are working condition better in such small companies or worse?

Managers at large companies routinely shaft shareholders; thus, it is not implausible to claim that in the case of sexual harassment the interests of owner and employees coincide (i.e.: they both gain if they get rid of sexual harassment); and similarly, for many other oppressive work conditions.

This may be true, but it’s incorrect to say “the law is really helping the managers here, not the workers.” The law is obviously intended to prevent abuse of workers; if it happens to coincide with management’s interests, that’s fine, but it’s really not “put[ting] the state on the side of the owners.” It just happens to be the case that it may benefit owners as well.

Jerry, I see it as a practical matter, more than principle: i.e., should we expect that owners of large companies to side with workers against managers in asking for laws against (certain) abusive work conditions? Does it happen in practice? If not, why?

@79 katherine @39 “libertarians honestly didn’t know whether or not “fuck me or you’re fired” was something that should be stopped.”

seems exactly true to me. On the one side we have arguments that the superior should have complete freedom, on the other side arguments that workplace discipline will break down if subordinates have any freedom at all. Then–a bonus!–we have a few too many arguments, for my taste, that the preceding arguments are obviously, however unfortunate it may be, absolutely true.

Is there some kind of empirical evidence that labor markets are going to go all slack if bosses cannot coerce sex from their employees? Because otherwise I’d say this is a pretty false dichotomy.

I was not saying that there was any consistent empirical tradeoff between full employment and regulations — this depends entirely on the regulation, and certainly I don’t think there would be such a tradeoff in the FMOYF case. It’s actually weird to apply microeconomic theory to the full employment tradeoff anyway, as basic economic theory is about efficiency and utility maximization and not employment at all — a regulation requiring everyone to have their own personal butler would be extremely inefficient but would likely create a lot of jobs. I think there is a reasonable argument for some kind of tradeoff between regulations that restrict firing and the ease of moving between jobs and between the formal and informal economy (thus creating in-groups and out-groups), but you have to look at the whole institutional framework.

But if there was any tradeoff I’d take full employment. Over the past few decades there has been a proliferation of new legal rights on the books for workers but at the same time the decentralized mechanisms that support localized worker power — unions and tight labor markets — have been greatly weakened. That hasn’t worked out too well.

it’s incorrect to say “the law is really helping the managers here, not the workers.”

that’s not what I was saying, you’re reading that in yourself. Just because the law helps owners (not managers) doesn’t mean it doesn’t help workers, there is no contradiction. Your pension fund might be the owner. The point was that anyone whose primary concern is the actual productivity of the firm would obviously not want the managers treating it as their personal bordello. And that is hard to police; not only are top managers frequently not the owner but the presence of multiple owners means that one owner can exploit others.

MQ, why don’t you make that argument against regulations that actually have the effect you describe, like the Davis-Bacon act? Sexual harassment is unlikely to have an effect one way or the other on wages: the nature of the power dynamic means those with little are likely its victims, and will likely remain with little. Employers are callously indifferent to sexual harassment, not choosing to pay for it.

Also: I don’t remember Chris Bertram’s reasons, but Flanigan’s argument (as you’re presenting it and IIRC that’s correct but I don’t have time to read it again right now) implies that if most women expect to be asked to perform any personal service for their boss, up to and including sexual favors, there’s nothing any other woman can do about it, because it’s implied to be part of her contract too.

Bianca,
Flanigan (whose post started this discussion) said that FMOYF should be stopped
“My intuition is that something like (b) makes sexual harassment wrong. In these extreme cases employees do have the authority to decline certain tasks that employers demand. In this case the employee may say ‘you lead me to believe that the job did not require prostitution, so I have been deceived.’ Because it is wrong to deceive people, it is wrong to radically change a person’s job description, and so threatening to fire someone for refusing to comply with an impermissible demand is also impermissible.”
you may not like her reasons, but you cannot deny that she spoke against it.

Watson–you’re absolutely right about sexual harassment but wrong about Davis Bacon–show me the evidence, as opposed to the libertarian fantasy, that it reduces employment. That said, the Tabarrok post is revolting on both positive and normative grounds. The idea that employers “pay for” sexual harassment is the kind of clever-clever nonsense by which the Marginal Revolution types shittify the profession’s reputation.

Just because the law helps owners (not managers) doesn’t mean it doesn’t help workers, there is no contradiction. Your pension fund might be the owner. The point was that anyone whose primary concern is the actual productivity of the firm would obviously not want the managers treating it as their personal bordello. And that is hard to police; not only are top managers frequently not the owner but the presence of multiple owners means that one owner can exploit others.

Sure, I agree with all that. But the problem of policing sexual harassment doesn’t really go away if you make it illegal. If the firm is as productivity-maximizing as all that, then it’s already concerned with sexual harassment (on the grounds that it hurts employee output). So that firm doesn’t even need the law to help it, even if it doesn’t otherwise care about the issue at all. On the other hand, firms that aren’t already policing sexual harassment would seem not care that it damages productivity, so they can’t be disincentivized on those grounds. That’s who the laws are for. I’m not sure we’re really disagreeing here, but I think it’s important to point out that sexual harassment is not something that occurs as some sort of market mechanism; it occurs because of power imabalances and bad people thinking they can get away with abusing that power.

Bianca, if by “put out for the boss” you mean “have sex with him”, the whole point is that that is NOT how workplaces are: sexual harassment happens, but it is not the norm.
In those jobs where sexual favors are part of the job (as in “explicitly written in the contract”), asking to have sex is fine; in the vast majority where they are not part of the job, they are not.

@MQYglesias is pretty clearly right in the real world—if you had the choice, you would take (permanently) tight labor markets plus less labor regulation over more labor regulation and slack labor markets, right?

I’m not sure these are the only possible choices. It’s my observation, having watched other economic recoveries, employment numbers are the last to gain traction. Workplace regulations hardly enter into it. The demand for labour is driven by consumer activity and is not particularly attenuated by workplace regulation, by my lights. Costco pays its employees more than Sam’s Club and doesn’t lock them into the store. The Costco employees also steal less.

Tabarrok opines in his reply: All else the same, cars that get more miles per gallon will sell for higher prices than cars that get fewer miles per gallon. .

After the OPEC embargo under Carter, the auto industry tried to supply econoboxes which got better mileage. Nothing doing — the consumer market wanted sport utility vehicles which got worse mileage. The auto industry responded accordingly. When the Cash for Clunkers program was in effect, people didn’t buy the lowest-mileage vehicles. The begged question resides in the ceteris paribus of mileage alone: a Prius or a Volt can arguably recoup the higher sunk cost of a battery-powered system over time in reduced fuel costs but that’s not how consumers weigh their purchasing decision.

In a world driven by short-term results, not long-term investments, neither workers nor managers cannot be reduced to Marxist caricatures. The managers are in the same predicament: decisions come down from on high like the thunderbolts of Jove. Often middle management is the first part of the order of battle to be pared away in the “Rightsizing” of a corporation, as nasty a bit of Newspeak as was ever coined. All this talk of “in-group” and “out-group” doesn’t make any sense. There’s the board of directors, who report to the shareholders. They’re the “in-group”. Everyone else is in the “out-group”. Until that situation is corrected, until worker have a say in the management of the corporation, as we see in ESOP corporations such as Southwest Airlines, we shall continue along this tediously Marxist lines.

Manta1976: the whole point is that that is NOT how workplaces are: sexual harassment happens

Yes, I agree. But (1) if that is not how workplaces are, abstracting the discussion to “freedom” generally is wrong. And (2) how do you know that’s not how workplaces are? Even if you’ve been working for 15 years, say you arrive at a new company and the women suggest you’re supposed to, say, flirt, with the male managers, and their reasons are PRECISELY that this is how workplaces are supposed to be (their reasons for why you disagree could be anything). You complain at Thanksgiving dinner and your uncle says yeah that’s what workplaces are. Your grandmother says what else can women expect in a male environment like a workplace. Your ex-boyfriend says to you, well, I have to suck up to them too, it’s exactly the same thing. Your old Movement buddies say that’s capitalism for you, work at an NGO instead. What’s your argument against them? Flanigan’s argument, which you cite, leaves you with nothing.

I kind of agree with the idea that regulation looks a little like it places the owner on the side of workers. If there’s a conflict between a middle-manager, or a foreman, and a worker, is the manager automatically assumed to be speaking with the authority of the owner or CEO? Or is the worker allowed to use their own judgment and decide for themselves what the owner would want?

bianca, if I understand you correctly, you are asking “what would be the right moral approach to a society quite different from the one where we live”?
And my answer is: I don’t know, and I don’t care: general moral principles are useful only insofar as they give a guide here and now; the fact that they might be contradictory in unlikely situations does not bother me one iota.

Can’t we just ignore Matt Yglesias? There are millions of people in the world constantly posting crap on the internet. I appreciate his ability to turn a passing knowledge of high school level neoclassical economics into a career as an economics blogger. It is kinda cute how enthralled conservatives are with a guy who self-identifies as a progressive and writes from the right of Tyler Cowen, but I don’t find anything politically or intellectually interesting in it.

Without doubt, MY is no Milton Friedman. Friedman was smart and (at least partially) knew what he was talking about. He also, unlike MY, opposed the Iraq War.

@Kukai
Since this is YAMYT, how many times in his career has MY implied that working condidtions would be different if the owners of the company weren’t capitalists, but the government or something along those lines?

Forgive me, I’m new here and the YAMYT acronym doesn’t appear in my lexicon. Matt Yglesias only opens his mouth to exchange feet, seemingly. That he has survived his many bouts with intellectual self-mutilation should give hope to us all.

Government Brand Beer is an exceedingly bad idea. If capitalism is to work, and there’s no reason to believe it can’t, it will follow the wiring diagram of a common-emitter amplifier, where small changes in input translate to large changes in output. There’s some biassing involved to tune this circuit. All metaphors ultimately fail at some level but this one seems particularly apt, for without some worker input, the “in-group” cannot possibly understand what’s happening where the money is made. Every good restaurant needs a maître d’ for the same reason.

Libertarians absolutely have to live in denial of social costs of markets. Without prohibition FMOYF is merely another unrecognized cost of the labor market. Yes, it costs money to recognize (like an accountant) these costs, but the cost remains recognized or not (it cost money to be hiring new employees all the time.) This is why Libertarians are perfect stooges for businesspeople who loathe having to recognize the social costs of their private profits.

What could he possibly mean? That workers can get away with complaining to OSHA and EOC and all, but salaried people know their job consists of (not personal services exactly but) doing just what the big(ger) guy asks, and it only gets worse the higher up you get? And what does this imply anyway? That the solution is to help workers get into the middle class by taking away OSHA and EOC, thus forcing them to act like managers?

JV: “it’s important to point out that sexual harassment is not something that occurs as some sort of market mechanism; it occurs because of power imabalances and bad people thinking they can get away with abusing that power.”

Manta1976: ““normal” worker have the right to refuse sex, prostitutes must have sex if they want to get paid.”

Sexual harassment occurs in “the workplace” because “the workplace” is typically a hierarchy, not a market, where the power imbalances are part of the design, for instrumental economic reasons.

To the extent that ethical principles have an institutional context, it is a pretty straightforward exercise in moral reasoning, to see why sexual harassment is illegitimate: it is an exercise of power in the hierarchy, which doesn’t serve the legitimate economic functions of the hierarchy in controlling a production process.

If prostitution is a legitimate economic “production process” — if you can buy sexual intimacies from a sex worker — that might, to some, seem like a contradiction. I don’t think it is.

You don’t have to believe that prostitution is morally acceptable as an economic good or process. Even if you do choose to think sex work or prostitution, in some forms, is morally acceptable as a part of commerce, you might still think that it shouldn’t be a commercial activity carried out by hierarchies, precisely because the power imbalances introduced, increase the hazards and reduce the ability of the prostitute to manage and protect him/herself in the most intimate and personal ways.

We don’t permit slavery, which is to say we don’t allow people to commit themselves, even voluntarily, let alone be committed involuntarily, to working in hierarchies, under the most extreme terms. Even if you sign a contract committing yourself to general employment for a term of years, courts of law are very reluctant to compel such specific performance, as enforcement of the contract, because that would be equivalent to permitting slavery, which is outlawed; you can never alienate your own free will and inherent moral capacity to refuse, to quit.

The libertarians seem to want to argue that the inalienable right to quit is morally sufficient to all circumstances, to resolve every problem, without organization among the subordinates or governance in the public interest by the state. I think that’s nuts, and I actually find myself struggling to engage with people, who insist that that is their view. What are they missing about one of the most ubiquitous economic relations any of us experience, that they can think what they claim to think? If they are struggling with the issue of sexual harassment in the workplace, what are they going to do with hazardous chemicals or dangerous jobs in general?

About Tabarrok’s response and your answer to it: for sexual harassment there is a “reporting” problem. But Tabarrok’s analysis applies also to other working conditions, where reporting is not a problem: for instance, do call center with worse working conditions (to take an extreme, the “no bathrooms break” example in the post) pay more or less on average than other call centers?
I would expect that such studies exist, and should not suffer of the same problems (but maybe different ones?). Any suggestion?

Manta1976 – there is a persistent tendency for threads below posts criticizing Matt Yglesias to turn into discussions of whether he is an 8, a 9, or a 10 on the scale of human despicableness, with various forms of amateur psychological analysis of why he is as horrid as he is. This makes for a boring discussion, without much intellectual depth, so I have started to strongly discourage it. I can understand why some people find Matt Yglesias annoying (just in the same way that I can understand why some people find _me_ annoying) but we want this to be (most of the time) a blog discussing ideas, rather than the specific personal flaws of this or that blogger.

I am sorry my archness did not translate any better than it did. I was asked how many times MY has advocated for some government intervention, he’s at it again, may I add, piling on about the LIBOR scandal, a day late and a dollar short. MY is not a despicable human being. Nonetheless, cría fama y héchate a dormir, your dissent from his positions uses phrases such as extremely dodgy, which might lead the unwary novice in wrong directions. I will attempt to avoid personal remarks in future.

The major difference is that Matthew sees a useful tool with modifications and caveats. Economics is actually good at investigating tradeoffs, especially when prices are involved, so when we are talking about employment (an activity with a price) it isn’t a bad place to start.

You apparently don’t think economics offers a very useful tool here, and you want to replace an economic mode of analysis with ummm well it isn’t clear. I think it has something to do with power dynamics.

The problem I see (which may be me misunderstanding you) is that you seem to want to throw out the only generally useful tool available and replace it with mushy political analysis. Matthew seems to want to say something along the lines of “yes, we can take power dynamics in to the already useful (but not infinitely useful) economic analysis”.

He also bothers to notice the trade off positions which libertarians and leftists both seem to ignore when they try to reduce everything to a ‘rights’ analysis. This particular set of exchanges seems to want to leverage the “fuck me or your fired” case into the idea that ALL employer demands ought to be analyzed through a prism of rights. It is the libertarian mistake made exactly in mirror image.

Matthew argues that the workplace involves lots of tradeoffs between employer and employee needs. He argues that trying to analyze that in a ‘rights’ framework is counterproductive in the vast majority of actually occurring workplace issues. He argues that analyzing it from a ‘rights’ framework is likely to hurt the material well being of poor people in a non-full-employment economy by keeping them from getting jobs at all.

Manta1976 07.11.12 at 12:55 pm
” BTW, I would add that I did not find a reasonable explanation from people at CT on why prostitution is morally acceptable, while FMOYF is not: Flanigan’s explanation seems fine to me, but Chris (and I think the other people at CT) did not like it; so: what is their take?
(apologies if it has been answered in comments).”

” The major difference is that Matthew sees a useful tool with modifications and caveats. Economics is actually good at investigating tradeoffs, especially when prices are involved, so when we are talking about employment (an activity with a price) it isn’t a bad place to start.”

The whole theme of this set of posts has boiled down to that it’s not.

” You apparently don’t think economics offers a very useful tool here, and you want to replace an economic mode of analysis with ummm well it isn’t clear. I think it has something to do with power dynamics.”

Yes – power dynamics, sociology, and that reality stuff.

” The problem I see (which may be me misunderstanding you) is that you seem to want to throw out the only generally useful tool available and replace it with mushy political analysis.”

Economics is capable of examining all that reality stuff. The fact that it so often fails is not a necessary aspect of the discipline itself, but a function of its practitioners. Henry hints at this in his update:

It perhaps says something more general about the economics profession that this paper got published in a high impact journal, despite its obvious problems

Manta1976@94: You ask why owners don’t join with workers in advocating for laws against sexual harassment. My off-the-cuff answer is “because defending lawsuits is expensive.” Also, here in California and elsewhere in the U.S., we already have laws against sexual harassment — both civil laws, and, in the extreme, pure case of “fuck me or you’re fired,” criminal ones. Speaking from the perspective of someone who is in-house counsel to a company with about 3000 employees, and who has taught the biannual sexual harassment course required by California law, we can and do say, “Not only will we fire you for this, but your victim can sue you and you will be facing potentially tens or hundreds of thousands of dollars in damages as well as all the embarassment of being a defendant in a harassment suit.” Of course, the victim can, and most likely will, if he or she chooses to sue, also sue the company. Do the productivity gains/avoided losses from the extra disincentive to harassment the prospect of a lawsuit provides make up for the hundreds of thousands of dollars a single wrongful termination suit will cost the company? Do they even make up for the cost of the premiums for the company’s EPLI policy? I very much doubt it.

Let me be clear that I am not advocating that we get rid of these laws. I think we need them. I am simply attempting to explain to people who wonder why owners aren’t necessarily enthusiastic about laws that force them to do something that is in their best interests to do anyway.

I would add — and given how I make my living, I am definitely not arguing in my own economic interests here — maybe lawsuits aren’t the best way to enforce these laws. In the wage-and-hour context, California employees have the option of complaining to the Labor Commissioner rather than filing a lawsuit. When they do, the first thing that happens is you get a settlement conference presided over by a hearing officer who actually knows something about the topic at hand. They can make a credible assessment of what (if anything) you owe the employee, and these cases often resolve themselves before you run up a six-figure bill in attorneys’ fees and court costs. In my experience, cases where the EEOC (or the California equivalent) actually conduct an investigation rather than simply issuing a right-to-sue letter also tend to resolve themselves more cheaply.

Actually, that paper, even if it’s results are true, wouldn’t help very much. Because consider this: the results are true and that means that a workplace with a higher incidence of sexual harassment pays a premium of 25 cents per hour. That adds up, over a 50-week work-year with 40-hour work-weeks, to be $500. Now, let’s say that the pattern of sexual harassment is so intolerable that the worker quits. In virtually all cases, if the worker stays unemployed for over a week, she will have lost the entirety of the premium*. Given that it usually takes substantially longer than a week to find work, especially at the higher ends of the income scale, it’s hard to say that the worker could really accrue any sustainable benefit even if the premium exists.

So yeah, sure, you can use economics, if you like. Just be sure to count all the costs, rather than selectively leaving some out.

*: unemployment insurance may extend this period, but not to much longer than two weeks.

Sebastian (and also Aaron Swartz, who asked this question from the opposite ideological perspective) – I think this is a misunderstanding of what I am trying to argue. I am not arguing that _all_ economic analysis is bunk. Instead, I am arguing that a particular style of analysis – the ‘econ 101′ style, which both pervades policy debate, and which also frequently infects the thinking of economists who should know better, is loaded with a whole lot of ideological assumptions, which mean that it is very poorly suited to analyzing e.g. questions of power relations in the workplace. If you start from an intellectual framework in which there is _no such thing_ as power relations in the workplace, and assume that contracts are shaped instead by actors’ preferred tradeoffs, then you assume away the problem by fiat. This also leads to intellectual abominations like the sexual harassment article, which assumes for the purposes of analysis a set of assumptions that are grossly implausible, and that seeks to ‘save the phenomenon’ in the face of cock-eyed findings that men need to be compensated twice as much as women for entering industries with higher rates of sexual harassment. NB that this was not a paper that was cherry picked by me – it is a paper that Alex puts forward as an examplar of the superiority of his preferred style of economic analysis.

This doesn’t mean that you need to get rid of economic analysis _tout court._ There is much work that is sensitive to these questions – see e.g. Suresh Naidu’s varied contributions. There also are circumstances under which economics 101 analysis can be useful. But in order to figure out these circumstances, you really need to be self-conscious about the assumptions that it rests upon, and the circumstances under which these assumptions are likely to be implausible, and to blind you to important causal relationships. You also should read a lot more e.g. economic sociology and comparative political economy as both of these fields also have a lot to say.

More generally, the post _does not_ argue that Econ 101 is wrong, and that there is an alternative, equally straightforward and simplifying framework that we can apply across the board in its stead. Instead, it’s saying (repeatedly) that one should look carefully at the underlying assumptions of your models to see if they are a good way of capturing the dynamics that you want to investigate, and discard or modify them if they are not. And when you are looking at questions of power relations in the workplace, accounts which have no intellectual room for hierarchy (as the simple econ 101 approach does not) are unlikely to be particularly helpful. This is doubtless less satisfying than a one-size-fits-all alternative – but it has the merits, I think, of being right. There are a number of plausible approaches that I think one could apply to workplace issues, ranging within economics e.g. from Gary Miller’s gift-exchange-via-indefinitely-iterated-games account, through various power-centric accounts. I don’t have any particular insight as to which of these would be best for understanding specific industries or specific forms of workplace abuse. But I do know that if one doesn’t have any intellectual means to _think_ about hierarchy and power, one isn’t going to come up with any very satisfying answers about how they work.

Which power relation is not included in econ 101 models? “Market power” is an econ 101 concept and it’s all you need to explain why e.g. unions get a wage premium. Also, adding market power to Yglesias’ model doesn’t actually change its conclusion, as I explained 43. Do you mean something else by “power relations?”

The problem, Dr. Farrell, is that the economic conditions under which people grow up contributes to their politics and the rhetoric with which they express them, and so consideration of those economic conditions is necessary for effective political dialogue. Even if you find it rude.

I’ve never found it auspicious to let Libertarians choose the ground on which I’m to do battle with them, but Henry and Cosma have accepted exactly those terms and pulled off a great victory nonetheless. I’m impressed. Kudos also to Bruce Wilder, who in several of these recent threads has shown a real genius for calling a spade a spade, and then very patiently explaining why it’s a spade to all those insisting against the evidence that it’s an electric toothbrush.

Freddie – I don’t find your purportedly structural analysis especially insightful, useful or relevant. Instead, I find it annoying. I find you annoying. Doubtless you find me annoying. This is an unhappy situation for all, but there is a possible solution. Since you have your own blog, where you can post on _whatever you want_ to your heart’s content, I suggest you do so. I won’t have to read it, and you won’t have to deal with norms at CT that are not to your liking.

temp – I mean power within organizational hierarchies, such as firms, which are exactly relevant here. Economic analysis of the inner workings of firms has not advanced very far (if you don’t believe me, ask Ronald Coase).

William Timberman – yes on Bruce Wilder’s comments. Cosma had a pinboard entry earlier today on one of my posts where he said more or less ‘the post is fine for what it is, but what you _need_ to read is Bruce Wilder’s account of firms. ‘ Which seems exactly right.

And here’s the comment, which is directly on point to temp’s query above. I should point to two pieces of economic analysis, David Kreps’ famous piece on corporate reputation, and Gary Miller’s _Managerial Dilemmas: The Political Economy of Hierarchy_, both of which use game theory to tackle these questions, but in a very different way than the Econ 101 story.

Sorry, Henry. I could have made that point without mentioning Yglesias, and should have.

No one’s mentioned the issue of dignity. I can’t explain the mechanism in economic terms, but an executive making in the high six figures is hardly going to go without the perks he feels entitled to, be they A/C or whatever. Whatever the reason, if it isn’t customary to go without it, he may never live it down–may never get that perk back again, even in places where it’s expected–he could get stuck back ata the lower-prestige job where it isn’t expected. You could see both the low wages and the poor working conditions in a low-end restaurant as going along with a lower-tier job, and the people who stay there as being the ones who don’t get any farther. And a woman who works five years in an office where she’s not subject to sexual harassment will have better work experience and generally a better chance of having her next job be a good one, at the end of that time, than one who was at a decent workplace where she was treated as the equal of her male coworkers.

In econ 101 models, total compensation is a reflection of (market) power relations, but firms should be indifferent towards the form of compensation granted to workers (working conditions vs wages).

So, the violation of econ 101 is that sometimes firms do act like they care about the form of compensation. And this is due to “power within organizational hierarchies.” I understand how this works in the sexual harassment example: abusive managers don’t want to protect workers from abuse. The case can be evaluated by considering the interests and the powers of all relevant actors. But how does this work in the employee search scenario? Do you agree with Bruce Wilder that managers will inflict arbitrarily abusive conditions on employees (such as unnecessarily intrusive search) just to preserve their own status? Is that the proposed mechanism here?

In the absence of evidence, what’s your proposed alternative to defaulting to the Econ 101 story? Is there an equally-plausible Crooked Timber theory that we can default to instead?

For this one I would be happy with “folk industrial organisation theory” as a default – that something which looks like a nasty little piece of authoritarian crap probably is what it looks like, and that there should be a rebuttable resumption that it’s just a bit of tinpot Little Hitlerism unless someone can come up with a convincing argument from price theory or game theory that it’s actually a mutually beneficial implicit contract. Basically I don’t want to be bringing anything in that looks like it might oblige me to consider that Blakey from On The Buses was the hero.

I read through the Gary Miller Gift Exchange in Negotiations Between Principal and Agent paper. It bears out what I’ve always suspected, that the best contracts are tailored to the sum of risk averseness. Some contractors love fixed bid work. Others only want an hourly rate with maybe a performance bonus.

FWIW, my software contracting these days is drafted using the Agile/RUP methodology, where a project is divided into smaller deliverables called Stories, thus providing a cyclic feedback mechanism, reducing perceived risk for both sides by increasing confidence levels. As each Story comes in, the owner exhibits obvious gratitude and relief. The contractor has a sense of having completed something. It’s intensely rewarding for both parties. If a story gets in trouble, there’s a measure of confidence already built up. Meaningful discussions arise about the Story, not the project in total.

These Agile type contracts are set up on a per-Story basis. This defines what Done means. It’s a huge improvement over the old style of contracting, where the consultants would sit in the conference room for months, the owner fretting and wringing his hands, constantly changing the specification, driving the consultants crazy.

I found that bit about small talk and benevolence especially insightful. While benevolence is important, trust seems more important. Trust is always earned, many small deliveries encourage trust on both sides. Remember all those 80s and 90s “trust building” exercises? Nonsense, most of it, but there’s a core of truth in there, somewhere. Everyone has his own risk level, his own measures of confidence.

That paper Tabarrok quotes is generally terrible. It has numerator-denominator bias in the calculation of the exposure variable, for starters; it doesn’t adjust for individual confounders, so it’s not able to explore relationships between workplace variables or individual variables and the supposed relationship (let alone account for variation between workplaces within industries); the author hasn’t allowed for the possibility that the data is missing not at random; and hourly wages are calculated on the assumption that “usual hours worked per week” are correctly reported in the CPS. Also, is the CPS a probability survey and if so did the author use probability-weighted sample estimates for denominators?

Plus of course there’s the completely obvious reporting problem that Henry identifies in his post, that throws out the entire conclusions anyway.

Some people here seem to argue that there is a difference between a normal job where your boss abuses you, for example by forcing you to have sex with him, and a job where sex is part of the definition, for example prostitute or porn actress .
I think that this miss the point. If a girl can choose between various reasonably paying jobs, and chooses porn actress because she likes it, then no problem. But if a girl has not a choice between various jobs and is forced to become a porn actress because she need to put bread on the table, then this is also a form of coercion, not different from FMOYAF.
Coercion lies in the asimmetric power relationship, not in the way it takes place.
This is true also for other forms of abuse, as for example extremely hard jobs.
In southern Italy in those years it often happens that immigrants are fotced to work in the fields picking fruits at horrible conditions for risible wages. They do this becouse they may be in big economic problems. This is a form of coercion.
It is true that, if their employers were forced to pay higher wages, many of them would simply be unemployed and thus in a worse situation, however this just means that it is society as a whole that is coercing them, not just the specific employer , but not that they are not coerced.

To slightly paraphrase John Kenneth Galbraith*, The modern libertarian is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for boorishness.

*conservative/libertarian, selfishness/boorishness (I ‘m taking selfishness as a subset of boorishness, with the broader term also covering harassment or any other objectionable behavior a truly free person might wish to “buy”.)

And following through on that thought, does Tabarrok propose that those who think they are more likely to sexually harass than be sexually harassed would be willing to accept a lower wage? Total wages remain the same and no messy freedom-limiting government regulation required! … Although since firm owners can sexually harass the employees (they’re on the right end of the power spectrum for that) they should be willing to accept less profit. So (must try and think)… firm owners who have positive utility for sexually harassing employees, pay the low-level employees more, sexually-harassing management less*, but are willing to sell their products for less and accept less profit and therefor win in the market.

*But no sexually harassing management or the whole scheme falls apart; it takes discipline to be a successful firm owner.

I often suspect that libertarianism is just a cover story for authoritarianism. It can be either the authoritarianism of the dictatorial daddy, who feels completely and narcissistically justified, or the authoritarianism of the dutiful and protective child of the dictatorial daddy, who is sure that the abuse was always for the child’s own good; the Fox News conversation between the two seems to flow smoothly with little consciousness of the deceptions necessary to maintain that smooth relation.

But, here, in comments on this topic, where many people have little to do with either mode of political psychology, it seems particularly jarring. I think I’ve made it abundantly clear that I think the Econ 101 mode of reasoning is inadequate to the case of labor relations within a bureaucracy, but Econ 101 does address conflict — Supply and Demand, Firms and Households, Sellers and Buyers, Capital and Labor are in conflict and Econ 101 does have some things to say about the consequences of an imbalance of power in that conflict — what happens to price and output and the allocation of surplus value and deadweight losses, when one party exercises the “power” of a monopoly (or monopsony), and behaves strategically, to even a minor degree. And, what happens is far from ideal. The deal goes south from its ideal optimum.

So, though, I think the Econ 101 model is wrongly applied, I wonder where the intuition comes from, which suggests that the party in the conflict with greater power, “maximizing” its own profit, is going to act benignly, so benignly that introducing some countervailing power — organization among the subordinates to coordinate their actions (a union) and/or government intervention to improve fairness in the arbitration of disputes — is just naturally going to be futile or counterproductive, instead of moving closer to the optimal ideal of perfect competition, where all strategic behaviors are neutralized and a perfect balance of interests prevails.

Random Lurker @147 offers this caveat: “if their employers were forced to pay higher wages, many of them would simply be unemployed and thus in a worse situation” and I offer this as an example of what seems to me to be an intuition at odds with what Econ 101, read plainly, should suggest. (I apologize for putting Random Lurker on the spot; I definitely do not intend any kind of accusation of authoritarianism; it was just the most recent comment I could use as an example, and a mere aside in Random Lurker’s comment.)

It seems to me that, if employers of the farm workers in question, could be forced to pay higher wages, many of the farm workers would earn more and work shorter hours, and from what little I understand of the factual cases where grapes or lettuce or tomatoes in the U.S. were concerned, I’m guessing the impact on the price of produce would be fairly trivial. Improving the balance of power ought to move, generally, in the direction of a more positive-sum game, with smaller deadweight losses to strategic manipulation. It seems to me that’s intuitive “moral” you should derive from a plain reading of the textbook fable of perfect competition and monopoly, as opposite poles.

But, that’s not the story, and especially not the moral of the fable, the libertarian conservative pushes forward.

It is characteristic of the political worldview of an authoritarian to want to invoke the authority of the conventional “ought”, so it is not surprising to see the conventional textbook analysis invoked. It is also characteristic to defend, with the force of strenuous denial, the basic goodness of powerful authority figures and the world they have made for us.

There are some sophisticated (some might say convoluted and tendentitious), Friedmanite and Public Choice theories, which can justify the usual conservative critiques of futility and unintended consequences, for any policy intervention, of course. But, that’s not Econ 101. You have to take a long journey from Econ 101 to get there, and it won’t feel like solid ground, because it’s not. Econ 101 does feel like solid ground, and in some ways it is; but, it would seem to indicate that moving in the direction of greater balance of power improves outcomes. That’s not the story authoritarians want to tell though.

I just read the Alex Tabarrok post which Henry responds to in his update, and it’s interesting that he accepts that this mechanism is real: managers can use their power to abuse workers against the narrow profit-maximizing interests of the firm.

So maybe there’s not so much distance on theory between CT and MR after all? Tabarokk seems to agree that “power within organizational hierarchies” (Henry 137) can indeed subvert expected econ 101 outcomes. Henry in 139 approves of game theory to go beyond econ 101, while Tabarrok agrees that “the way to think about these issues is not to throw out economic reasoning but to apply the reasoning ever more deeply.” So: agree on the need to go beyond econ 101, agree that power relations do matter and sometimes need to be included in the model, disagree on empirically the extent to which bosses actually act in an abusive rather than profit-seeking manner?

It’s nice to feel that the long-winded by-products of a hobby horse are not completely wasted. Thanks for the notes of appreciation. And, thanks again to temp, for his stubborn patience in conversing with me.

“I often suspect that libertarianism is just a cover story for authoritarianism.” B.W. @150

I haven’t followed all of these threads, but, though slightly OT, (though my idea is debating with MY is a waste of time and energy), I’ll add my $.02 worth on libertarianism as an ideology, (rather than taking it seriously as an economic theory). It’s not just that libertarians’ idea of human agency, i.e. “freedom”, is asocial and effectively impossible, a metaphysical phantasy full of wishful thinking, nor just the fact that they quickly elide questions about human agency with obsessions about property rights, ( with contractual relations the model of all volitional action). It’s that they don’t really care about “freedom” at all; rather they only invoke “freedom”, (actually 1st person solipsism), in order to impose discipline on others, in the name of “personal responsibility”. Libertarianism is really disciplinarianism. This also goes to the strange alliance between economic libertarians and religious fundamentalists. It’s the same antinomian theology in both cases, whereby the invocation of inviolable “liberty” converts into the cause of submission to the pre-ordained order.

This is, famously, in Knight, so this is pretty conventional, even traditional economics, and not a fatuous claim that economists simply have it all wrong, because people are not rational, or whatever.
The assumption of economic rationality makes the concept of society impossible because it assumes utility is solely a function of individual choice. It’s important to challenge this not because “economists simply have it all wrong … or whatever” but because it’s a profoundly ideological statement that distorts all subsequent discussion.

Which isn’t to say that the assumption isn’t incorrect. When a deer calf is isolated and frightened it goes silent and still, but frightened human infant will cry out. This is because for as long as humans have existed as a species babies have only had the chance of survival so long as they lived in safe environments, environments only made possible by the cooperation of many individuals bound together culturally and emotionally: by society in other words. This is about as basic an observation of human life as it’s possible to make. And when an assumption is taken as axiomatic that is both self-evidently false and ideologically biased, it’s an error to permit that to go unchallenged.

Rationality is not without its place. If a behavioural economist detects biases in the actions of share traders it’s reasonable to conclude that they’re errors simply because profit is the sole motive of the exercise. But, to take just one example, applying the same rationale to someone like Giordano Bruno who chooses to hold to his beliefs regardless of cost shows both how easily it unravels and where we’d all be if everybody took it to heart. Bruno went to his death because he knew what every human child under the age of two innately understands: that there really is such a thing as society. It exists regardless of culture and has been a consistent evolutionary motif for hundreds of millions of years.
But Bruno’s sacrifice only made sense because his views were so unusual. If everybody bar the inquisitors shared his opinion, he’d have been a fool not to recant. So it’s not possible to evaluate Bruno’s utility function without previously examining society as a whole, which is enough to conclude that economic rationality is a simplifying assumption that is of no use in simplification.

Every baboon understands the distinction between “our troop” and “their troop” and the utility function has no utility in making sense of this. And to observe that such an idea, recent and political in origin, warps all subsequent discussion in a way that favours a given party’s interests is quite different from a “fatuous” claim that economists are “simply wrong”. It’s only sensible to wonder why one faction might insist on basing all argument on a claim that it’s trivial to refute.

Adrian, I am not an economist, but it seem to me that you are misunderstanding what an “utility function” is.
(If I understand it correctly), a utility function is a “black box” used inside a model to encode the preferences of the individual (and it may remain unknown).
Thus, nothing prevents my utility function from taking into account your well-being.
To take your “baboon” example: the utility function of a baboon will take into account the well-being of others individual in his tribe, and not the one of baboons not in his tribe; or maybe it might even consider individuals in other tribes in a negative way.

Thanks to etv13 at@130 for his answer: in retrospect, the answer should have been clear (firms do not like laws against sexual harassment, because lawsuits cost money to them…).

Nothing except the fact that the theory then becomes horribly complicated. Very few economists are willing to go there. (You’ll find a few of course if you look hard enough.) I think Adrian has it right.

Firstly, the utility function concept fails as a simplifying assumption if the opinions and desires of all other individuals must be assessed in order to assess one person’s utility function.

Secondly, the point about the baboons is that only by observing their behaviour collectively is it possible to form a complete picture of them as individuals. The reverse is not possible: you cannot comprehend baboon kind by observing a succession of baboons in isolation. As humans we may hope to rise above tribalism of course, but it still holds true that any picture of humanity that excludes as does economic rationality concepts like hatred, loyalty, affection or grief is willfully and pointlessly blind.

I would add as a personal opinion that the idea that Bruno somehow derived satisfaction (utility) from being roasted alive is pretty bizarre. The notion of his sacrifice being of value to him as educating others can be accounted for via the utility concept, though only as you say as a black box — which is of no predictive value. But this utility is contingent both on the thoughts and beliefs of others (making Bruno’s utility function a (time-variant) function of everyone else’s utility functions) and on Bruno’s understanding of the (totally irrational) impact his sacrifice would have.

B) He sacrificed himself for the greater good, understanding the impact this powerful display of fortitude would have.

Now Bruno was more of a mystic than a rational or scientific thinker, but it’s a fair guess that he understood well the emotional power of his sacrifice, which called to mind in a Christian legal tribunal those of the Christian martyrs before him. And we have two stories (A) and (B) describing this act. (A) is not only absurdly convoluted, it lacks any descriptive power. (B) on the other hand is a very simple narrative, and makes no false claims to the imprimatur of science.

Adrian, a utility function does not express “enjoyment”: it has no a priori semantic interpretation; that is its limitation, but also its power (since the same formalism can be used to model very different situations).
I don’t think it can be useful to describe the behavior of a single individual, be him Bruno or any other person, though (however, if we had a population of Brunos…).

According to Wikipedia, “in economics, utility is a representation of preferences over some set of goods and services”. It goes on regarding revealed preferences to quote Alfred Marshall as writing that “utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly, by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire”.

Utility may not be useful describing a single individual, but it’s routinely used in that way all the same. But the real point remains that all conclusions predicated upon such an assumption are ideologically biased in addition to being merely inaccurate.

I’m going to open a verrrrrry controversial can of worms here and a massive threadjack, about the article upon which Tabarrok rests his case that people who’re sexually harrassed get more cash, and the author’s excuse that they “didn’t have an instrumental variable” so couldn’t “prove causality,” to paraphrase Henry. From the huge numbers of replies to this comment one will be able to judge just how seriously the world takes econometrics, so here goes …

Am I the only person in the world who gets the shits with the way economists use instrumental variables? Blame it on Bradford-Hill if you like, but I really hate the way economists seem to think they can prove causality if only they have a good instrumental variable.

You don’t prove causality with stats, you prove it with a well designed experiment, and no matter how many IVs you stick up your fundament, a cross-sectional analysis of aggregate data with a denominator drawn from a different data set is not going to cut the mustard. Look at the Bradford-Hill criteria and there isn’t a single one that that paper meets. So why pretend that having a few more IVs would solve the problem?

You can’t prove causality with a cross-sectional survey. End of story. Econometricians who try to tell you otherwise are frauds or … otherwise bright people who have been led down an analytical cul de sac by a really low-brow discipline. Bloggers who cite such econometricians when they should know better are … well, wankers, really.

The median wage in the US is about $26,000. The minimum wage in Australia is about $31,000. AUD/USD is around parity at the moment, so the two numbers are directly comparable.

Parity? Not in PPP terms it isn’t. You’ll need A$1.50 to buy the stuff you’d get for US$1. (At least you would last year, according to the World Bank.) So that Australian minimum wage is really only $2o,ooo or so in US terms. Still well clear of the US minimum wage, which is a bit over $14,000, but not fantastic.

faustusnotes (in the comment currently known as 163): while agreeing wholeheartedly that too many econometricians do horrible things with, and because, of instrumental variables, there certainly are times when one can do causal inference from observational, even cross-sectional, studies. See, for instance, chapters 21–25 here, or, better yet, Pearl’s “Causal Inference in Statistics”. I haven’t read the paper on harassment in question, and doubt very much indeed that its analyses meet proper identification criteria, but such things do exist and don’t just amount to instrument-mongering.

@163: You don’t prove causality with stats, you prove it with a well designed experiment

Yup,there’s a feasible suggestion: let’s randomly assign people to be sexually harassed.

I too have qualms about IVs, but (a) they’re nowhere near as full-of-crap as you seem to think; and (b) you’re proposed alternative is infeasible.

While people could certainly benefit from toning down causality claims (although when you look at actual articles they’re often quite good on this), we need to work with the tools available – of which IVs are one, but not the only one. As with experimental evidence, replication (in this case potentially more triangulation using different methods) can just as/if not more valuable than better design in an individual case.

Do you agree with Bruce Wilder that managers will inflict arbitrarily abusive conditions on employees (such as unnecessarily intrusive search) just to preserve their own status?

People seeking to become managers are going to be disproportionately people who like bossing others around, and having elevated status. Unless those who hire managers are careful, they’re going to enrich the proportion of domineering assholes at every step of the way. Unless those who supervise the managers carefully supervise them (and why should they?), domineering assholes in positions of authority over those with bad options are going to indulge in their taste for domination and assholishness. In the usual way, many of them will also convince themselves that it’s a harsh necessity. Casting this as a principal-agent, if-only-the-tsar-knew-what-his-cossacks-were-doing problem (cf.) is left as an exercise.

conchis, look at the wikipedia summary I linked to: there’s not a single condition that Tabarrok’s pet paper meets. Most importantly: plausible mechanism. No IV will rescue you from the simple fact that your suggested causal mechanism is complete and arrant shite.

The article Cosma links to links to another article about being a picker in a distribution centre that should be required reading for anyone who has a libertarian bent. The bit where the undercover reporter meets and speaks to the retired Americans who have no pension and are travelling the country in their campervan working in distro centres that require you to run around in 38C heat for 8 hours a day – that’s comedy gold that is.

@Cosma Shalizi
OTOH: In certain fields, the test for “is your boss going to rope you into management?” begins with “would you rather sit in a room arguing for ten hours over the color of a button, or would you rather give up your chance to dictate the color of a button in order to get out of the room and do something else?” OTOH the test for “are you going to get promotions even if you don’t move into management?” begins the same way.

I’d like to add something about full employment as a protection against abuse. I live in a full-employment society (Japan) and it is consistently observed that the worst factor of Japanese people’s lives is their jobs, which are hard, demanding and often quite low paid. It’s a deflationary society, and wages growth is static, so full employment is no guarantee of good wages; and because there is not enough work to go around, everyone works very long hours. Furthermore, when you work in Japan you really work, there’s none of this facebook-at-work or “homing from work” crap that happens in, say, the UK.

Also, because there’s not enough work to go around and finding new workers can be tough, employers find other creative ways to keep workers. The main one, of course, is an employer culture of frowning on people who move jobs a lot, and people here are extremely reluctant to change jobs lest they slowly slide down the employment ladder.

Even where there’s an over-supply of workers and wages are hideously low – like in hairdressing – working hours are very long and excess staff are not hired. I’m willing to bet very few people on this thread have ever worked like a Japanese hairdresser in a full employment economy, or for such poor wages.

Full employment doesn’t protect Japanese staff against summary dismissal, unreasonable demands, having only 1 day off a week (routine) or having one’s two days off separated and scheduled differently from month to month. It doesn’t stop employers having long reduced salary probation periods, and it doesn’t make work environments safer. See, e.g., people who work in the convenience stores here, who earn 700-800 yen ($7 – $8) an hour and have to do all their own heavy lifting, frying, and electrical work in often cramped and hazardous spaces (I have witnessed accidents in these environments). It also doesn’t protect consumers when their underpaid and overworked bus driver, for example, crashes his bus into a retaining wall because he fell asleep at the wheel.

So full employment is no panacaea for workplace abuse, and if you think otherwise I suggest that you come to Japan and take up a manual labouring job.

1) Every day, and on Sundays, too, I will trade full employment over increased labor regulations.

2) The recent posts by Yglesias, I’ve generally taken in the context of the past few months. That is, Yglesias (and I), has very little faith in institutions anymore, and if you’ve been reading him over the past 6 months or more, he generally wants to talk more about brute force mechanisms for better social utility, such as NGDP targeting, more than he wants to talk about more useful fixes such as a national repair plan for some archaic infrastructure or other. In general, his attitudes are fundamentally set around being concious of veto points and aiming at the areas with the fewest of them, and I think his misconcieved argumentation with CT is about this internal logic rather than engaging with Henry’s priorities in the narration.

3) I really would have liked a more specific discussion about cheap labor conservatism and what that really entails both in market terms and in political economy terms. Women who trade sexual encounters with superior usually get noneconomic benefits, and if anything, such women depress wages for other women. Same with women who put up with abusive bosses. In a dixiecratic environment, aquiescence fundamentally enables lower pay, not higher pay, with an employer mindset focused on “winning” various zero sum games. This situation also subverts the ability of the state to rectify such bad situations, and is a key reason why we want both full employment and labor regulations (they’re enforced more in full employment too, ya know–feedback cycles).

Parity? Not in PPP terms it isn’t. You’ll need A$1.50 to buy the stuff you’d get for US$1. (At least you would last year, according to the World Bank.) So that Australian minimum wage is really only $2o,ooo or so in US terms. Still well clear of the US minimum wage, which is a bit over $14,000, but not fantastic.

Still laughing over this one. (Not your fault, ajay.)

I wasn’t comparing minimums, but Australia’s minimum with the US’s median.

PPP is very useful when comparing, for example, poverty levels. It really does make a difference if rice costs 1.0 USD/kilogram in the US but only 0.25 USD/kilogram in India.

It’s not so useful higher up the income scale, nor for internationally traded goods. If a burger flipper at McDonalds in Australia is in the market for, say, an iPod, a camera, a TV, a refrigerator, a Toyota, a washing machine, an iPad, etc, she’s in a much better position than the median USican.

There’s also another aspect to the World Bank’s PPP that seems to work in the US’s favor, but really doesn’t if you think about it a bit. The PPP adjustment also includes the cost of labor. It does not help the average working slob in the US that she gets paid less than the average working slob in Australia.

I wasn’t comparing minimums, but Australia’s minimum with the US’s median.

Yes, I was aware of that. I’m sorry if you found my answer confusing; I should have been clearer.

It’s not so useful higher up the income scale, nor for internationally traded goods.

Which don’t make up the majority of most people’s spending. It’s housing, food, transport, fuel, and so on – non-internationally traded goods. I don’t imagine that, even in Australia, minimum wage workers are buying many iPads and Toyotas per year. The PPP rate may not be perfect, but it’s a better comparison for a conversation about minimum and median wages and living standards than the market exchange rate, and using the PPP we can see that your claims about the superiority of Australian minimum-wage employment for the typical American are exaggerated.

There’s also another aspect to the World Bank’s PPP that seems to work in the US’s favor, but really doesn’t if you think about it a bit. The PPP adjustment also includes the cost of labor. It does not help the average working slob in the US that she gets paid less than the average working slob in Australia.

No, but it helps her that other working slobs are being paid less, because they’re the ones providing her with goods and services.

Which don’t make up the majority of most people’s spending. It’s housing, food, transport, fuel, and so on – non-internationally traded goods.

This is plainly wrong. If we’re comparing Australia with the US, then food, transport and fuel are internationally traded goods.

I don’t imagine that, even in Australia, minimum wage workers are buying many iPads and Toyotas per year.

I get that you don’t imagine that. That’s OK. The reality, though, is otherwise. Every minimum wage earner in Australia has a greater capacity to buy more iPads and Toyotas than the USicans. And what’s this “per year” stuff? How many Toyotas per year do think is appropriate?

I’d like to go back to what bianca steele says at 107. The idea, if I’ve got it right, is that “sexual harassment is wrong because the worker didn’t know that was going to be part of the deal” means that sexual harassment would be just fine in a world where workers could reasonably expect it to be part of the deal. Bianca steele points out that that world is not too far from our own. All you need to get there is an increase in sexual harassment. Bosses, as a class, can get around the “didn’t know it was going to be part of the job” mechanism just by making it part of the job, as indeed it was in many sectors in the not-too-distant past. The “not part of the job” idea only works in a world with the very checks on employer power the libertarians object to. In a world without those checks sexual harassment could and would become part of many jobs and nobody could say a thing about it. Nice deal for the bosses, if anything they can be reasonably anticipated to do is ipso facto permissible to them.

Maggie: even if we lived in a word where sexual harassment was the default, employees could ask that the contracts specify “no sexual harassment”.
They may find difficult to get a job with such a contract: but the problem stems from the fact that in such a word in most job you get sexually harassed in the first place.

The analogous situation in the actual word would be “many people can choose only among jobs with shitty working conditions”.
But people, including libertarians, DO have things to say about it; in the present discussion, for instance, the disagreement stems from very different opinions about HOW to remedy this situation (push for more regulations or for better macro policies? As people before, I don’t see why you cannot push for both, but I am not a libertarian), not whether it is a good one.

Hey, why not just redefine terms so the world is all happy? It’s all the women’s fault that they think “sexual harassment” is some kind of awful, “coercive” thing. It’s all in their mind. In fact, it isn’t even about sexual harassment at all, probably, just about some Very Important Work Thingie that men do without thinking about it because they’re not all tied up in knots by teh emotion.

bianca, I don’t see what you are trying to say.
If by “Very Important Work Thingie” you mean “working conditions”, I will remark that the title of the post is “Regulations and frictionless marketplace assumptions”, and deals with the question if and how much better/more regulations can prevent abuse of workers, up to and including preventing sexual harassment: thus, your ire would be better directed to Henry for making a post that mixes sexual harassment with other workers abuse.

Maggie,
That world is far from my own. I don’t think professional women are subjected to outright sexual harassment as a regular thing. At least that doesn’t seem to be the case in my experience.

On the other hand, in some places, I think, it does seem to be more common. It also seems quite logical that it would be a regular thing for almost all women, if you extrapolate out the lives of teenage and college girls, and women walking down the street, to the workplace. And combined with the idea that sexual favors aren’t necessarily different from other favors, it’s a little too handy for people who are preoccupied with the idea that What’s Wrong With America is Young People Don’t Know How to Do a Job Properly (with a little Women are Wusses Whose Excessive Influence on American Young People Are Ruining America).

The other problem with “not part of the job”–a similar problem, actually–is that it just doesn’t deal with the problem. Setting sexual harassment aside, is it okay if women are supposedly expected to get dry cleaning for the boss when men are not? If women are expected to get promoted after four years when men get promoted after two years? (Or is this just because women are statistically dumber and can’t do the same job?)

Though, yes, this whole subject is off-topic. The original post by Chris Bertram dealt with sexual favors, this one does not. That first post devolved into a discussion of whether workplaces are just terrible, because, simply, Capitalism–which is a worthy topic of discussion. But kind of shut out women who might have wanted to suggest there was a difference, because weren’t they then defending No Bathroom Breaks?

And I do think Katherine identified a problem, and another reason women don’t want to participate, which is that there are a lot of people, apparently, who really don’t want to distinguish sexual harassment from other kinds of requests by the boss. So, although I know the topic wasn’t chosen by the CT posters, it seems like a bad choice from certain points of view.

When I read your post, I was not sure whom you were complaining, and about what: in particular, I thought that you were objecting to some comments (including mine) that were not distinguishing sexual harassment, and I pointed out that the post itself was “guilty” of that.

Manta1976:
If your defense is regularly going to be, “I mean exactly the same thing as the OP, and I know I’m doing a good job saying exactly what the OP wanted to say, because, hey, I’m ME!” . . . well, then, okay.

Not everything is addressed to you, incidentally. If you really think women who think they’re sexually harassed are only projecting a handy label onto the same treatment men get, and you want to admit that’s what you think, . . . again, okay.

bianca, I think our discussion went too long for other people to find interesting, so this will be my last answer.
First of all, when someone writes a barely intelligible post in a very angry tone just after a post of mine, and this barely intelligible post seems to be related to what I wrote, I tend to assume that the poster is angry at me specifically: I am glad, though, that it was misunderstanding, and I apologize for that.

My defense was “the approach to the topic in discussion was chosen by Henry”, not “I agree with whatever the Henry is saying”, nor, much less, “I am repeating the same things the Henry was saying, but I am doing it better”.
The part I left unspoken is “… and I imagine Henry can defend himself better than I would defend him”.

*Katherine*, apologies–that could have been better phrased. My idea, right or wrong, was that oppressive systems, like all bullies, seek the cooperation of victims (even if it’s just one or two, or especially so, out of many) in their own oppression, because it legitimates the desired inequity and makes it easier to perpetrate. Aside from the very limited exception of the individuals who do what they can to seek approval, I don’t think *any* women would choose to participate in oppressive systems had they a choice.

shah8: “1) Every day, and on Sundays, too, I will trade full employment over increased labor regulations.”

I know I’m not telling you anything you don’t already know, but that trade is not available.

Economists talk meaninglessly about “microfoundations”, because the rational expectations revolution was the intellectual equivalent of a front lobotomy, but, in real life, micro and macro have a reflexive relationship. It is tempting to think that one is the climate and the other is the weather, and you can improve the weather, by improving the climate, but, in the case of the economy, at least, the relationship runs both ways: a lot of bad local “weather” adds up to a bad economy. The Great Recession, a period of poor macro performance, is a consequence of losing the regulatory battles over the distribution of income and risk, as well as a cause of the loss of middle and working class income, jobs and wealth. It would almost be more accurate to say that the Great Recession caused the “realization” of middle class losses, a mere accounting acknowledgment of the economic consequences of political policy losses, in the regulation of banks and bankruptcy and trade and labor relations, which should have accrued in the public mind much earlier, when they occurred, when they were put into effect.

Except too few pundits, journalists, politicians and economists had either the insight or integrity to draw the connection between poorly regulated mortgage banking, poorly regulated finance, a housing bubble, and the prospective fleecing of the middle class in taxpayer-financed bank bailouts combined with a wave of foreclosures under corrupted procedures, bankruptcy reform that removed home owner protections, etc. Even after the fact, mainstream economists were modeling the financial crisis as a “shock” — a bolt from the blue, I guess, a terrible, unpredictable storm, which gathered without ever darkening the visible horizon. The Mark Thomas are going to get back to us real soon now with DSGE models that will earnestly explain how we should respond to such a large financial “shock”, but no confessions concerning how or why so many economists worked so long and hard to create that financial catastrophe have been forthcoming.

After the libertarians and the neoliberals have destroyed the New Deal institutions, with predictable results, Yglesias has lost “faith”.

We don’t need “faith”; we need the opposite: a common pragmatic understanding of functional necessity and consequence in the operation and design of our institutions.

When we enter into the neoliberal/libertarian framework of ideas, adopt their stilted jargon and cliched conventional wisdom (never mind models and assumptions), to conduct our public political discourse concering economic policy, as Yglesias the pundit does, we haven’t just “lost the argument” in the stylized battle between ideological partisans, we’ve lost our ability to even make sense to one another. We aren’t using terms, with clear denotations to things we can observe; we aren’t talking about relationships we’ve experienced. We are talking about policy for a “market economy”, which isn’t, mostly, an economy of “markets”. We’re using a vocabulary of vague metaphors — “markets” and “skills” and “frictions” and even vaguer explanators: “supply and demand”, and, wait for it, “business confidence”.

Arguments are more hypnosis than logic, and the neoclassical fairy tale has us in an enchanted trance. We don’t need to have or lose faith; we don’t even need to challenge assumptions, so much as we need to wake up.

shah8: “3) I really would have liked a more specific discussion about cheap labor conservatism and what that really entails both in market terms and in political economy terms.”

Yeah, me, too. And, not just cheap labor conservatism, but financial fraud conservatism and environmental pollution conservatism and rent extraction through privatization conservatism and a bunch of others.

While the ideologues claim innovation and efficiency, the politics is holding hostages to carry out a robbery: if we can’t poison your groundwater, you can’t have jobs or gas.

Perhaps you can tell me why I am “loopy” for listing the findings of economic historians about the causes of economic growth and the failures of government programs. I am not a regular readerof the blog, so it would be most helpful to the conversation if you sent a copy to me directly, deirdre2@uic.edu

In clinical psychology, an effective tactic in disabusing a patient of a delusion, is to join him in the delusion, pressing from within the premises of the delusion for cognitive dissonance. The patient will notice the clinician’s delusion, before his own, and won’t like the clinician’s questioning the occasional suspension of delusional belief for convenience’s sake.

I don’t know if there could be any analogous strategy that a philosopher could use in addressing a case of pathological epistemic closure, such as that demonstrated by the community of Chicago-school, libertarian conservative economists. This looks more like a cult, where too many have joined the delusion already.

“I don’t reject any policy without considering what its results are. If someone says there’s going to be regulation, I don’t say that regulation will be bad. Let’s see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn’t like to say that all regulation would have this effect because one can think of circumstances in which it doesn’t.”

Then, when asked directly, he couldn’t think of an example, in which regulation wasn’t bad; I don’t think merely pointing out the contradiction is going to help — it would seem almost redundant with the delusional’s own embrace of cognitive dissonance.

The Chicago Tribe’s shared arrogance — so evident in the casual and contemptuous dismissal by the freshwater economists of the Keynesian legacy, which prefaced so many absurdly ignorant pontifications on the global financial crisis and Obama’s 2009 proposal for fiscal stimulus — appears in another guise in Professor McCloskey’s pose of objectively reporting the factual[!?] findings of [all? otherwise unidentified] economic historians.

Even without knowing much of anything about economic history, or of the controversies, which animate the small band of academics specializing as economic historians, I think it is pretty easy to pick up the clear indicators of delusion (or deception, albeit self-deception) at work. Almost nothing she asserts with so much passionate conviction is even factual, let alone factually true.

When she does state a verifiable fact — “State-armed psychiatrists in America jailed homosexuals, and in Russia jailed democrats” — it isn’t to counter a factual controversy, but to justify a ritualized moral narrative, where government (the state), in the abstract, is inherently a moral force for evil. As far as I know, these facts are not in dispute, though most of us haven’t bought her moral narrative trope for government as evil contaminant, it is the latter proposition, which she thinks should be accepted as entailed as a consequent, Justified True Belief.

Mostly, though, her “facts” are not facts at all, but counterfactuals in disguise. The epistemic closure she embraces as a member of Tribe Chicago, rests, it seems, on Justified True Belief in a series of counterfactuals, substituting for facts: not what happened in history, but an alternative context of meaning manufactured out of the assertion of counterfactuals, a kind of alternative history, which is not recognized, as the literary version is, to be a genre of entertaining fantasy.

Counterfactuals have a useful and necessary place in historical narrative. History only happens one way in retrospect. Counterfactuals are essential to recovering the sense of contingency, which shaped people’s behavior when they were actually living and doing, fighting and striving. Otherwise, the historian can fall into a false narrative of inevitability. But, counterfactuals, which are not anchored firmly to facts and a contemporary sense of contingency, are nothing but a projection from a priori theory, which robs the actual facts of history of their most obvious meaning.

“Some of the New Deal prevented rather than aided America’s recovery from the Great Depression” ties to a vast array of revisionist hackery, popular among economists on the Right. McCloskey doesn’t commit to any of it specifically, but, somehow, I doubt that she’s thinking only of Roosevelt’s 1937 turn toward a balanced budget and the Fed’s tighter monetary policy, as slowing recovery (which recovery was actually very, very rapid over the 4 or 8 years after 1933, by any reasonable standard of factual comparison, 1937 notwithstanding.) A pair of tenured knuckleheads, Cole and Ohanian, have published a fantasy in econometric dress, which has gotten a popular reception among libertarian economists, including at regional Federal Reserve Banks, in which they imagine a counterfactual Great Depression, in which falling wages aid a speedy recovery. In the actual event, the economy nearly collapsed under the weight of a runaway deflationary spiral, which left 25% of the workforce unemployed and 50% underemployed, but never mind all that; their ideology insists otherwise, that pro-labor Hoover messed up, in talking up wages, and, look: math! What happened doesn’t matter, because their ideology gives them confident insight into what didn’t happen, and that determines the meaning for them. Cole and Ohanian are hardly isolated — Amity Shlaes, from a legitimizing perch at the Council on Foreign Relations, has published a popular polemic rewriting the history of the Great Depression, and hosted conferences, featuring such luminaries as Robert Lucas, regarded by many on the Right as the father of modern macroeconomics, whose views of causality in the New Deal recovery can best be described as wholly incoherent.

McCloskey makes a whole series of assertions about the lessons of economic history, whose referents are counterfactual stories, made up by right-wing hacks.

Unions raised wages for plumbers and auto workers but reduced wages for the non-unionized. Minimum wages protected union jobs but made the poor unemployable. . . . Regulation of electricity hurt householders by raising electricity costs, as did the ban on nuclear power. The Securities Exchange Commission did not help small investors. Federal deposit insurance made banks careless with depositors’ money.

The only way one can even make sense of these assertions is by modifying the meaning of the actual facts, with counterfactuals. Did unions reduce the wages of the non-unionized? That becomes an argument about what non-union wages would have been in the absence of unions. The historical facts of rising non-union wages won’t matter. Did minimum wages make the poor unemployable? Again, the libertarian argument is going to be from a counterfactual, alleging higher rates of employment in some alternative scenario (higher rates of income, though? — guessing they’ll finesse that one a bit). Did regulation of electric utilities raise electric prices? Falling electric rates — the historical fact — are going to be assumed to happen despite regulation, while the effects of regulation, per se, will be assumed to be deleterious, by the standard of a counterfactual manufactured from their theoretical imaginations. Did the FDIC make banks careless with depositor funds? There’s an historical record of carelessness before the FDIC, and a long history of regulated care after, but those facts will be set to naught by some counterfactual analysis, deducted from theory.

Libertarian conservatives love a Peltzman effect, and are eager to embrace Ricardian Equivalence in its most simplistic form — anything to rationalize an insistence on futility for progressive or liberal policy. And, they are convinced that deductive logic supports epistemic closure, that all follows from sound theory. Even that isn’t true.

McCloskey tells us, “Externalities do not imply that a government can do better.” Well, actually, they do. Maybe, they do not imply that a government will do better, but they definitely imply that government can do better. “Externalities” are an awkward way of saying that firms are externalizing their costs, imposing those costs on others, and not accounting for them properly in their own decisions. There’s no deal at all governing the use of some input, and a bad deal in the market(s) for product(s) of that input, because full costs are not figuring in the decision-making. Government can do better, by compelling or enabling a deal for the input, which the firm has been taking for free — government intervention to create property rights is necessary even for a Coasian deal. Maybe, in some deep primeval past, government had to be invented by merchants, to provide the public good infrastructure, so markets could emerge, but that’s proof of the necessity and beneficial potential of government properly constituted and dedicated, not evidence of its superfluousness.

The idea that unregulated and unopposed externalizing of costs and risks is consistent with some ideal of efficiency or innovation in an imagined market economy may be convenient to an elite of predatory capitalists, who seek to externalize costs on taxpayers, the natural environment, unwary consumers and non-unionized workers at every turn, but the claim that it is a product of rational deduction is specious, and the claim for factual support a delusion at best and a lie at worst. Calling it “loopy” was a tactful kindness.

Markets cannot exist without regulation. There must, at least, be a master of the market, honest weights and measures, acceptable currency. Without regulation, banks cannot work. As varies risk, so varies the need for regulation. What’s more, the regulated will always attempt to corrupt the regulators. These are simple facts, beyond discussion, known since the dawn of civilisation, seemingly acceptable to every Libertarian I’ve known.

The signal error of the bad historian is looking at the past through the lenses of the present. Let us charitably discount the opening broadside fired at economists in your 1983 Rhetoric of Economics: its resembles nothing so much as the gigantic mine detonated on first day of the Somme Offensive and was about as effective.

The scientific method is, in the words of Monty Python, not dead yet. It is doubt, not clarity or tolerance, which guides us forward. It has been my observation that those who would discount physics and mathematics in the study of economics do not understand enough about either mathematics or physics to say such things. Mathematics and physics attempt to describe the world as it is: if those descriptions fail, they fail to account for new evidence.

It is not Rhetoric but Proof which is the great persuader in these things, for rhetoric is utterly reliant upon the evidence. Proof does not trump Doubt: proof only means the current model has survived its latest battle with the evidence. But those battles take place in time, as the Battle of the Somme opened on that hot day on the first of July, 1916.

Je doute, donc je suis.

Let history show the perennial failure of the market to regulate itself and the beneficial effects of such regulation on those same markets. The creation of the Securities and Exchange Commission was not an “experiment”, it was an entirely necessary reaction to the failure of markets.

As for the pernicious effect of the trade union, they served the cause of markets well enough, staving off the rise of totalitarian Communism where they appeared. Unions did not reduce wages for the non-unionised work force, it demonstrably improved wages and working conditions across the board. If the electricians insisted upon raising the standards for home wiring, they saved many lives in so doing. Zoning laws have served their purposes well enough: they have been a part of municipal life since the Egyptians and Romans first put the tanneries downwind of their cities. The cavalcade of begged questions and leading answers presented in Factual Free Market Fairness is completely unsupported by evidence.

I grew up in Nigeria. I knew it before and after oil. In the Niger Delta, where once pygmy hippopotami and storks lived, rivers and swamps where elegant people poled on long canoes is now become a Mordor. For this transformation, you may thank the (unregulated) oil companies who created that hell and the asymptotic corruption of that wretched country. Nigeria was completely unprepared for what was to follow: Saudi Arabia was, because the Saudis were guided through 1938 by St. John Philby, a truly remarkable human being and a Socialist to boot, whose guidance might have made of the Middle East a very different place than we see today.

As a historical aside, the poor of Rome were not confined to holding pens. They weren’t confined at all: it was a destination for people from all over the empire. Because the Roman culture was reasonably well planned, over a million people were able to live in apartment blocks because they had access to garbage collection and drinking water. Not until the rise of London did another city feature over a million people. But even London got in trouble where Rome did not: until the great sewers of London were dug, old wells filled in and clean water piped in, London routinely had cholera outbreaks.

It doesn’t matter, really. The Libertarian and the Marxist are logical inverses of each other and all their excuses for failure are the same. Free Markets and Communism both aim for the attenuation of the State. Both have failed, selon les fidèles, because they weren’t properly implemented. And like the Marxists, they argue endlessly among themselves. And like the Marxists, they won’t be trusted with power by anyone who has ever lived in close proximity to their ideological paradises.

In response to Deirdre McCloskey @200 (since this was a public controversy, she is asking me in public etc, I prefer to respond in public). The rhetorical mode of “I have irrefutable empirical evidence to back up my claims, but to see it, you’ll have to get my book and otherwise I’ll not engage with you” is decidedly eccentric. But the out-and-out loopiness is really made explicit in the:

And note that if you scratch a sweet High Liberal you find an authoritarian Rousseauian underneath—that is to say, someone with great affection for “programs” that “we” do. I do not need to mention Stalinist collective farms or Maoist cultural revolutions to make the point, so I won’t.

I’m sure that there’s some term in classical rhetoric for the rather dishonest “I do not need to mention it, so I shall not mention it, but in fact look! I’m mentioning it!” maneuver. But that’s beside the point. The general claim that anyone who is a ‘high liberal’ has a “great affection” for collective programs like Stalinist collective farms and Maoist cultural revolutions is either evidence of the claimer’s quite fundamental disconnection from reality, or a disgusting lie. I am quite sorry that someone who was once capable of writing something as good as _The Rhetoric of Economics_ has become a hackish crank who is (in the kindest interpretation) incapable of distinguishing her ideological fantasies from the world she purports to study, but I fear that it is so.